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Note 5 - Credit Quality

6 Months Ended

Jun. 30, 2020

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, by loan 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.

	June 30, 2020
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	35,181	$	14,669	$	2,735	$	-	$	-	$	52,585
Commercial and industrial		153,507		22,852		7,939		-		-		184,298
Multi-family residential		80,539		21,771		3,458		-		-		105,768
Single family non-owner occupied		138,578		35,590		14,207		14		-		188,389
Non-farm, non-residential		474,297		207,483		41,320		-		-		723,100
Agricultural		6,650		3,443		314		-		-		10,407
Farmland		12,933		5,452		5,277		-		-		23,662
Consumer real estate loans
Home equity lines		94,694		1,397		3,475		-		-		99,566
Single family owner occupied		565,016		3,245		35,185		-		-		603,446
Owner occupied construction		14,498		202		611		-		-		15,311
Consumer and other loans
Consumer loans		112,537		109		1,905		-		-		114,551
Other		4,477		-		-		-		-		4,477
Total non-covered loans		1,692,907		316,213		116,426		14		-		2,125,560
Covered loans
Commercial loans
Construction, development, and other land		-		27		-		-		-		27
Single family non-owner occupied		191		-		-		-		-		191
Non-farm, non-residential		-		-		1		-		-		1
Consumer real estate loans
Home equity lines		7,803		379		330		-		-		8,512
Single family owner occupied		1,890		272		364		-		-		2,526
Total covered loans		9,884		678		695		-		-		11,257
Total loans	$	1,702,791	$	316,891	$	117,121	$	14	$	-	$	2,136,817

	December 31, 2019
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total
Non-covered loans
Commercial loans
Construction, development, and other land	$	45,781	$	2,079	$	799	$	-	$	-	$	48,659
Commercial and industrial		135,651		4,327		2,984		-		-		142,962
Multi-family residential		118,045		2,468		1,327		-		-		121,840
Single family non-owner occupied		149,916		7,489		5,776		-		-		163,181
Non-farm, non-residential		683,481		27,160		16,620		-		-		727,261
Agricultural		11,299		122		335		-		-		11,756
Farmland		17,609		4,107		1,439		-		-		23,155
Consumer real estate loans
Home equity lines		106,246		2,014		1,818		-		-		110,078
Single family owner occupied		580,580		17,001		23,116		-		-		620,697
Owner occupied construction		16,341		179		721		-		-		17,241
Consumer and other loans
Consumer loans		108,065		1,341		621		-		-		110,027
Other		4,742		-		-		-		-		4,742
Total non-covered loans		1,977,756		68,287		55,556		-		-		2,101,599
Covered loans
Commercial loans
Construction, development, and other land		-		28		-		-		-		28
Single family non-owner occupied		199		-		-		-		-		199
Non-farm, non-residential		-		-		3		-		-		3
Consumer real estate loans
Home equity lines		7,177		2,327		349		-		-		9,853
Single family owner occupied		2,111		275		392		-		-		2,778
Total covered loans		9,487		2,630		744		-		-		12,861
Total loans	$	1,987,243	$	70,917	$	56,300	$	-	$	-	$	2,114,460

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 dates indicated:

	June 30, 2020						December 31, 2019
			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
Construction, development, and other land	$	877	$	1,101	$	-	$	552	$	768	$	-
Commercial and industrial		2,890		3,458		-		576		599		-
Multi-family residential		341		772		-		1,254		1,661		-
Single family non-owner occupied		5,027		5,760		-		2,652		3,176		-
Non-farm, non-residential		7,659		9,433		-		4,158		4,762		-
Agricultural		261		265		-		158		164		-
Farmland		1,815		1,907		-		1,437		1,500		-
Consumer real estate loans
Home equity lines		1,604		1,756		-		1,372		1,477		-
Single family owner occupied		16,717		19,858		-		15,588		17,835		-
Owner occupied construction		540		548		-		648		648		-
Consumer and other loans
Consumer loans		500		507		-		290		294		-
Total impaired loans with no allowance		38,231		45,365		-		28,685		32,884		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		-		-		-		-		-		-
Multi-family residential		944		1,277		279		-		-		-
Single family non-owner occupied		-		-		-		-		-		-
Non-farm, non-residential		1,798		1,982		684		1,241		1,227		292
Farmland		-		-		-		-		-		-
Consumer real estate loans
Home equity lines		-		-		-		-		-		-
Single family owner occupied		1,769		1,869		370		1,246		1,246		353
Consumer and other loans
Consumer loans		-		-		-		-		-		-
Total impaired loans with an allowance		4,511		5,128		1,333		2,487		2,473		645
Total impaired loans⁽¹⁾	$	42,742	$	50,493	$	1,333	$	31,172	$	35,357	$	645

(1)	Total impaired loans include loans totaling $33.59 million as of June 30, 2020, and $24.64 million as of December 31, 2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment.

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 June 30,								Six Months Ended June 30,
	2020				2019				2020				2019
(Amounts in thousands)	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	7	$	882	$	5	$	790	$	15	$	1,091	$	12	$	795
Commercial and industrial		60		3,191		2		149		89		2,610		5		383
Multi-family residential		18		417		7		1,269		29		544		16		1,444
Single family non-owner occupied		37		5,203		28		3,237		72		4,652		56		3,116
Non-farm, non-residential		84		8,886		47		5,230		127		6,780		64		4,953
Agricultural		2		264		-		48		3		235		2		51
Farmland		15		1,835		10		1,438		36		1,698		26		1,444
Consumer real estate loans
Home equity lines		7		1,652		7		1,484		16		1,560		14		1,446
Single family owner occupied		122		17,251		154		15,838		290		17,401		278		15,889
Owner occupied construction		4		534		2		223		10		434		4		222
Consumer and other loans
Consumer loans		7		507		3		137		11		455		4		121
Total impaired loans with no related allowance		363		40,622		265		29,843		698		37,460		481		29,864

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-
Multi-family residential		-		944		-		-		-		943		-		-
Single family non-owner occupied		-		-		-		-		-		-		-		-
Non-farm, non-residential		14		1,884		8		553		14		1,611		8		277
Farmland		-		-		-		-		-		-		-		-
Consumer real estate loans
Home equity lines		-		-		-		-		-		-		-		-
Single family owner occupied		11		1,777		36		2,987		24		1,508		65		2,639
Owner occupied construction		-		-		-		-		-		-		-		-
Total impaired loans with a related allowance		25		4,605		44		3,540		38		4,062		73		2,916
Total impaired loans	$	388	$	45,227	$	309	$	33,383	$	736	$	41,522	$	554	$	32,780

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:

	June 30, 2020						December 31, 2019
(Amounts in thousands)	Non-covered		Covered		Total		Non-covered		Covered		Total
Commercial loans
Construction, development, and other land	$	540	$	-	$	540	$	211	$	-	$	211
Commercial and industrial		1,379		-		1,379		530		-		530
Multi-family residential		1,205		-		1,205		1,144		-		1,144
Single family non-owner occupied		3,071		-		3,071		1,286		-		1,286
Non-farm, non-residential		6,556		-		6,556		3,400		-		3,400
Agricultural		262		-		262		158		-		158
Farmland		1,106		-		1,106		713		-		713
Consumer real estate loans
Home equity lines		1,069		278		1,347		753		220		973
Single family owner occupied		8,521		21		8,542		7,259		24		7,283
Owner occupied construction		321		-		321		428		-		428
Consumer and other loans
Consumer loans		441		-		441		231		-		231
Total nonaccrual loans	$	24,471	$	299	$	24,770	$	16,113	$	244	$	16,357

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 $284 thousand as of June 30, 2020, compared to $144 thousand as of December 31, 2019.

	June 30, 2020
	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	$	-	$	82	$	438	$	520	$	52,065	$	52,585
Commercial and industrial		411		1,525		387		2,323		181,975		184,298
Multi-family residential		961		595		944		2,500		103,268		105,768
Single family non-owner occupied		976		1,114		2,315		4,405		183,984		188,389
Non-farm, non-residential		1,853		902		4,918		7,673		715,427		723,100
Agricultural		222		13		45		280		10,127		10,407
Farmland		14		99		1,025		1,138		22,524		23,662
Consumer real estate loans
Home equity lines		294		143		597		1,034		98,532		99,566
Single family owner occupied		3,181		982		3,613		7,776		595,670		603,446
Owner occupied construction		-		-		-		-		15,311		15,311
Consumer and other loans
Consumer loans		848		105		240		1,193		113,358		114,551
Other		-		-		-		-		4,477		4,477
Total non-covered loans		8,760		5,560		14,522		28,842		2,096,718		2,125,560
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		27		27
Single family non-owner occupied		-		-		-		-		191		191
Non-farm, non-residential		-		-		-		-		1		1
Consumer real estate loans
Home equity lines		62		113		114		289		8,223		8,512
Single family owner occupied		21		-		-		21		2,505		2,526
Total covered loans		83		113		114		310		10,947		11,257
Total loans	$	8,843	$	5,673	$	14,636	$	29,152	$	2,107,665	$	2,136,817

	December 31, 2019
	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	$	63	$	65	$	211	$	339	$	48,320	$	48,659
Commercial and industrial		1,913		238		507		2,658		140,304		142,962
Multi-family residential		375		-		1,144		1,519		120,321		121,840
Single family non-owner occupied		754		267		661		1,682		161,499		163,181
Non-farm, non-residential		917		1,949		3,027		5,893		721,368		727,261
Agricultural		86		164		-		250		11,506		11,756
Farmland		856		349		664		1,869		21,286		23,155
Consumer real estate loans
Home equity lines		1,436		165		503		2,104		107,974		110,078
Single family owner occupied		7,728		2,390		3,766		13,884		606,813		620,697
Owner occupied construction		207		-		428		635		16,606		17,241
Consumer and other loans
Consumer loans		1,735		439		202		2,376		107,651		110,027
Other		22		-		-		22		4,720		4,742
Total non-covered loans		16,092		6,026		11,113		33,231		2,068,368		2,101,599
Covered loans
Commercial loans
Construction, development, and other land		-		-		-		-		28		28
Single family non-owner occupied		-		-		-		-		199		199
Non-farm, non-residential		-		-		-		-		3		3
Consumer real estate loans
Home equity lines		144		28		-		172		9,681		9,853
Single family owner occupied		-		50		-		50		2,728		2,778
Total covered loans		144		78		-		222		12,639		12,861
Total loans	$	16,236	$	6,104	$	11,113	$	33,453	$	2,081,007	$	2,114,460

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 $500 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $500 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. 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 June 30, 2020, or December 31, 2019.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through June 30, 2020, the Company had modified 3,097 loans with principal balances totaling $436.11 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting.

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

	June 30, 2020						December 31, 2019
(Amounts in thousands)	Nonaccrual⁽¹⁾		Accruing		Total		Nonaccrual⁽¹⁾		Accruing		Total
Commercial loans
Construction, development, and other land	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		-		1,498		1,498		-		-		-
Single family non-owner occupied		543		1,279		1,822		552		595		1,147
Non-farm, non-residential		-		2,425		2,425		-		307		307
Consumer real estate loans
Home equity lines		-		83		83		-		115		115
Single family owner occupied		1,748		5,886		7,634		1,790		5,305		7,095
Owner occupied construction		-		218		218		-		221		221
Consumer and other loans
Consumer loans		-		31		31		-		32		32
Total TDRs	$	2,291	$	11,420	$	13,711	$	2,342	$	6,575	$	8,917

Allowance for loan losses related to TDRs					$	470					$	353

(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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
(Amounts in thousands)
Interest income recognized	$	152	$	84	$	250	$	147

The following tables present loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated:

	Three Months Ended June 30,
	2020						2019
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment⁽¹⁾		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment⁽¹⁾
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		1		80		81
Single family owner occupied								1		185		184
Total below market interest rate and extended payment term		-		-		-		2		265		265
Payment deferral
Commercial and industrial		1		1,106		1,106		-		-		-
Non-farm, non-residential		2		1,538		1,538		-		-		-
Single family owner occupied		1		70		54		-		-		-
Total principal deferral		4		2,714		2,698		-		-		-
Total		4	$	2,714	$	2,698		2	$	265	$	265

(1)	Represents the loan balance immediately following modification

	Six Months Ended June 30,
	2020						2019
(Amounts in thousands)	Total Contracts		Pre-modification Recorded Investment		Post-modificatio Recorded Investment⁽¹⁾		Total Contracts		Pre-modification Recorded Investment		Post-modification Recorded Investment⁽¹⁾
Below market interest rate Single family non-owner occupied		1		50		50		-	$	-	$	-
Total below market interest rate		1		50		50		-		-		-
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		3		454		432
Single family owner occupied								2		489		484
Total below market interest rate and extended payment term		-		-		-		5		943		916
Payment deferral
Construction, development, and other land		1		63		63		-		-		-
Commercial and industrial		2		1,708		1,708		-		-		-
Single family non-owner occupied		1		529		529		-		-		-
Non-farm, non-residential		3		2,115		2,115		-		-		-
Single family owner occupied		3		742		726		1		66		45
Home equity lines		-		-		-		1		4		3
Total principal deferral		10		5,157		5,141		2		70		48
Total		11	$	5,207	$	5,191		7	$	1,013	$	964

(1)	Represents the loan balance immediately following modification

Payment defaults on loans modified as TDRs restructured within the previous 12 months as of June 30, 2020, were for one loan in the amount of $124 thousand; there were none in 2019.

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

	June 30, 2020		December 31, 2019
(Amounts in thousands)
OREO	$	2,181	$	3,969
Total OREO	$	2,181	$	3,969

OREO secured by residential real estate	$	949	$	2,232
Residential real estate loans in the foreclosure process⁽¹⁾		2,621		1,539

(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