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Note 4 - Credit Quality

3 Months Ended

Mar. 31, 2021

Note 4. 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 table presents 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%. Covered loan balances totaled $9.04 million and $9.68 million for March 31, 2021 and December 31, 2020, respectively.

	*March 31, 2021*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Commercial loans
Construction, development, and other land	$	40,347	$	2,440	$	2,541	$	-	$	-	$	45,328
Commercial and industrial		153,725		3,556		4,946		-		-		162,227
Multi-family residential		96,018		6,215		3,359		-		-		105,592
Single family non-owner occupied		166,474		8,802		12,608		12		-		187,896
Non-farm, non-residential		577,928		106,228		34,674		-		-		718,830
Agricultural		7,430		1,611		682		-		-		9,723
Farmland		13,893		1,333		3,788		-		-		19,014
Consumer real estate loans
Home equity lines		87,260		1,294		3,541		-		-		92,095
Single family owner occupied		629,303		3,488		32,336		-		-		665,127
Owner occupied construction		18,090		-		286		-		-		18,376
Consumer and other loans
Consumer loans		115,895		23		1,987		-		-		117,905
Other		4,527		-		-		-		-		4,527
Total loans	$	1,910,890	$	134,990	$	100,748	$	12	$	-	$	2,146,640

	December 31, 2020
			Special
(Amounts in thousands)	Pass		Mention		Substandard		Doubtful		Loss		Total

Commercial loans
Construction, development, and other land	$	36,934	$	4,975	$	2,765	$	-	$	-	$	44,674
Commercial and industrial		160,625		7,065		5,519		-		-		173,209
Multi-family residential		103,291		8,586		3,284		-		-		115,161
Single family non-owner occupied		165,146		9,602		12,838		12		-		187,598
Non-farm, non-residential		568,438		125,907		40,448		-		-		734,793
Agricultural		7,724		1,686		339		-		-		9,749
Farmland		13,527		2,597		3,637		-		-		19,761
Consumer real estate loans												-
Home equity lines		91,712		1,488		3,326		-		-		96,526
Single family owner occupied		623,860		3,859		33,335		-		-		661,054
Owner occupied construction		17,232		201		287		-		-		17,720
Consumer and other loans												-
Consumer loans		118,134		28		2,211		-		-		120,373
Other		6,014		-		-		-		-		6,014
Total loans	$	1,912,637	$	165,994	$	107,989	$	12	$	-	$	2,186,632

The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated.

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at March 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Construction, development
and other land
Pass	$	3,119	$	13,696	$	6,642	$	5,879	$	2,205	$	8,364	$	442	$	40,347
Special Mention		-		282		-		1,179		682		251		46		2,440
Substandard		-		-		84		13		282		2,162		-		2,541
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total construction, development, and other land	$	3,119	$	13,978	$	6,726	$	7,071	$	3,169	$	10,777	$	488	$	45,328
Commercial and industrial
Pass	$	6,729	$	28,778	$	21,645	$	17,695	$	6,271	$	7,165	$	14,694	$	102,977
Special Mention		-		392		1,246		1,306		297		59		256		3,556
Substandard		-		422		1,081		343		1,728		1,343		29		4,946
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total commercial and industrial	$	6,729	$	29,592	$	23,972	$	19,344	$	8,296	$	8,567	$	14,979	$	111,479
Paycheck Protection Loans
Pass	$	22,436	$	28,312	$	-	$	-	$	-	$	-	$	-	$	50,748
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total Paycheck Protection Loans	$	22,436	$	28,312	$	-	$	-	$	-	$	-	$	-	$	50,748
Multi-family residential
Pass	$	3,110	$	28,363	$	6,296	$	2,147	$	5,557	$	49,593	$	952	$	96,018
Special Mention		-		-		-		-		2,573		3,642		-		6,215
Substandard		-		-		-		434		673		2,252		-		3,359
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total multi-family residential	$	3,110	$	28,363	$	6,296	$	2,581	$	8,803	$	55,487	$	952	$	105,592
Non-farm, non-residential
Pass	$	27,998	$	145,910	$	57,936	$	67,978	$	51,626	$	214,496	$	11,984	$	577,928
Special Mention		-		16,810		10,453		3,338		26,743		48,797		87		106,228
Substandard		1,340		741		5,738		9,583		9,951		7,186		135		34,674
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total non-farm, non-residential	$	29,338	$	163,461	$	74,127	$	80,899	$	88,320	$	270,479	$	12,206	$	718,830
Agricultural
Pass	$	1,041	$	2,506	$	1,426	$	590	$	936	$	430	$	501	$	7,430
Special Mention		49		128		366		650		328		30		60		1,611
Substandard		-		15		214		208		33		212		-		682
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total agricultural	$	1,090	$	2,649	$	2,006	$	1,448	$	1,297	$	672	$	561	$	9,723
Farmland
Pass	$	649	$	1,237	$	216	$	1,132	$	472	$	8,756	$	1,431	$	13,893
Special Mention		-		-		-		372		662		299		-		1,333
Substandard		-		15		943		252		255		2,323		-		3,788
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total farmland	$	649	$	1,252	$	1,159	$	1,756	$	1,389	$	11,378	$	1,431	$	19,014

(Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at March 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Home equity lines
Pass	$	162	$	683	$	696	$	303	$	110	$	10,643	$	74,663	$	87,260
Special Mention		-		-		-		122		-		519		653		1,294
Substandard		-		-		23		125		188		1,808		1,397		3,541
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total home equity lines	$	162	$	683	$	719	$	550	$	298	$	12,970	$	76,713	$	92,095
Single family Mortgage
Pass	$	55,294	$	241,770	$	76,583	$	61,791	$	55,113	$	304,325	$	901	$	795,777
Special Mention		-		916		1,133		275		2,655		7,311		-		12,290
Substandard		754		748		1,935		3,634		2,548		35,325		-		44,944
Doubtful		-		-		-		-		-		12		-		12
Loss		-		-		-		-		-		-		-		-
Total single family owner occupied	$	56,048	$	243,434	$	79,651	$	65,700	$	60,316	$	346,973	$	901	$	853,023
Owner occupied construction
Pass	$	900	$	9,816	$	2,747	$	1,932	$	456	$	2,239	$	-	$	18,090
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		286		-		286
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total owner occupied construction	$	900	$	9,816	$	2,747	$	1,932	$	456	$	2,525	$	-	$	18,376
Consumer loans
Pass	$	15,522	$	50,551	$	28,501	$	8,754	$	3,742	$	10,841	$	2,511	$	120,422
Special Mention		-		-		10		12		-		-		1		23
Substandard		-		378		978		215		162		175		79		1,987
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total consumer loans	$	15,522	$	50,929	$	29,489	$	8,981	$	3,904	$	11,016	$	2,591	$	122,432

Amounts in thousands)	Term Loans Amortized Cost Basis by Origination Year
Balance at March 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving		Total
Total Loans
Pass	$	136,960	$	551,622	$	202,688	$	168,201	$	126,488	$	616,852	$	108,079	$	1,910,890
Special Mention		49		18,528		13,208		7,254		33,940		60,908		1,103		134,990
Substandard		2,094		2,319		10,996		14,807		15,820		53,072		1,640		100,748
Doubtful		-		-		-		-		-		12		-		12
Loss		-		-		-		-		-		-		-		-
Total loans	$	139,103	$	572,469	$	226,892	$	190,262	$	176,248	$	730,844	$	110,822	$	2,146,640

Prior to the adoption of ASU 2016-13, the Company identified 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. When the Company determined that it was probable all principal and interest amounts due would not be collected in accordance with the contractual terms of the loan agreement, the loan was 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 date indicated prior to the adoption of ASU 2016-13:

	December 31, 2020
			Unpaid
	*Recorded*		*Principal*		*Related*
(Amounts in thousands)	*Investment*		*Balance*		*Allowance*
Impaired loans with no related allowance
Commercial loans
Construction, development, and other land	$	616	$	891	$	-
Commercial and industrial		2,341		2,392		-
Multi-family residential		946		1,593		-
Single family non-owner occupied		4,816		5,785		-
Non-farm, non-residential		8,238		9,467		-
Agricultural		218		226		-
Farmland		1,228		1,311		-
Consumer real estate loans
Home equity lines		1,604		1,772		-
Single family owner occupied		16,778		19,361		-
Owner occupied construction		216		216		-
Consumer and other loans
Consumer loans		818		833		-
Total impaired loans with no allowance		37,819		43,847		-

Impaired loans with a related allowance
Commercial loans
Commercial and industrial		-		-		-
Multi-family residential		-		-		-
Single family non-owner occupied		-		-		-
Non-farm, non-residential		1,068		1,121		319
Farmland		-		-		-
Consumer real estate loans
Home equity lines		-		-		-
Single family owner occupied		338		338		108
Consumer and other loans
Consumer loans		-		-		-
Total impaired loans with an allowance		1,406		1,459		427
Total impaired loans(1)	$	39,225	$	45,306	$	427

(1)	Total recorded investment of impaired loans include loans totaling $31.18 million as of December 31, 2020, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment.

Prior to the adoption of ASU 2016-13, the Company presented the average recorded investment and interest income recognized on impaired loans, excluding PCI loans. The table below presents the information for the period indicated:

	Three Months Ended March 31,
	2020
			Average
	*Interest Income*		*Recorded*
(Amounts in thousands)	*Recognized*		*Investment*
Impaired loans with no related allowance:
Commercial loans
Construction, development, and other land	$	8	$	1,299
Commercial and industrial		29		2,029
Multi-family residential		11		670
Single family non-owner occupied		35		4,101
Non-farm, non-residential		43		4,674
Agricultural		1		206
Farmland		21		1,560
Consumer real estate loans
Home equity lines		9		1,467
Single family owner occupied		168		17,550
Owner occupied construction		6		334
Consumer and other loans
Consumer loans		4		407
Total impaired loans with no related allowance		335		34,297

Impaired loans with a related allowance:
Commercial loans
Construction, development, and other land		-		-
Commercial and industrial		-		-
Multi-family residential		-		941
Single family non-owner occupied		-		-
Non-farm, non-residential		-		1,338
Farmland		-		-
Consumer real estate loans
Home equity lines		-		-
Single family owner occupied		13		1,240
Owner occupied construction		-		-
Total impaired loans with a related allowance		13		3,519
Total impaired loans	$	348	$	37,816

The Company generally places a loan on nonaccrual status when it is 90 days or more past due. Covered nonaccrual loans totaled $359 thousand at March 31, 2021; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the dates indicated:

	March 31, 2021
(Amounts in thousands)	No Allowance		With an Allowance		Total
Commercial loans
Construction, development, and other land	$	391	$	-	$	391
Commercial and industrial		1,781		-		1,781
Multi-family residential		854		-		854
Single family non-owner occupied		3,631		-		3,631
Non-farm, non-residential		7,295		-		7,295
Agricultural		267		-		267
Farmland		485		-		485
Consumer real estate loans						-
Home equity lines		1,035		-		1,035
Single family owner occupied		9,333		187		9,520
Owner occupied construction		-		-		-
Consumer and other loans						-
Consumer loans		847		-		847
Total nonaccrual loans	$	25,919	$	187	$	26,106

During the three month period, $9 thousand in nonaccrual loan interest was recognized.

The following table presents nonaccrual loans prior to the adoption of ASU 2016-13. PCI loans were generally not classified as nonaccrual due to the accrual of interest income under the accretion method of accounting. Covered nonaccrual loans totaled $297 thousand at December 31, 2020; the total was comprised of consumer real estate loans. The following table presents nonaccrual loans, by loan class, as of the date indicated:

(Amounts in thousands)	December 31, 2020
Commercial loans
Construction, development, and other land	$	244
Commercial and industrial		895
Multi-family residential		946
Single family non-owner occupied		2,990
Non-farm, non-residential		6,343
Agricultural		217
Farmland		489
Consumer real estate loans
Home equity lines		1,122
Single family owner occupied		7,976
Owner occupied construction		-
Consumer and other loans
Consumer loans		781
Total nonaccrual loans	$	22,003

The following table presents the aging of past due loans, by loan class, as of the date indicated. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Non-covered accruing loans contractually past due 90 days or more totaled $171 thousand as of March 31, 2021.

	*March 31, 2021*
													*Amortized Cost of*
	*30 - 59 Days*		*60 - 89 Days*		*90+ Days*		*Total*		*Current*		*Total*		*> 90 Days Accruing*
(Amounts in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Loans*		*Loans*		*No Allowance*

Commercial loans
Construction, development, and other land	$	40	$	-	$	384	$	424	$	44,904	$	45,328	$	-
Commercial and industrial		1,116		746		550		2,412		159,815		162,227		-
Multi-family residential		156		-		854		1,010		104,582		105,592		-
Single family non-owner occupied		778		655		2,042		3,475		184,421		187,896		163
Non-farm, non-residential		76		283		3,916		4,275		714,555		718,830		-
Agricultural		221		93		46		360		9,363		9,723		-
Farmland		9		-		485		494		18,520		19,014		-
Consumer real estate loans
Home equity lines		493		181		557		1,231		90,864		92,095		-
Single family owner occupied		4,455		1,291		4,477		10,223		654,905		665,128		-
Owner occupied construction		-		-		-		-		18,376		18,376		-
Consumer and other loans
Consumer loans		1,394		280		417		2,091		115,813		117,904		8
Other		-		-		-		-		4,527		4,527		-
Total loans	$	8,738	$	3,529	$	13,728	$	25,995	$	2,120,645	$	2,146,640	$	171

The following table presents the aging of past due loans, by loan class, as of the date indicated prior to the adoption of ASU 2016-13. Nonaccrual loans 30 days or more past due are included in the applicable delinquency category. Loans acquired with credit deterioration, with a discount, continued to accrue interest based on expected cash flows; therefore, PCI loans were not generally considered nonaccrual. Non-covered accruing loans contractually past due 90 days or more totaled $295 thousand as of December 31, 2020.

	*December 31, 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*

Commercial loans
Construction, development, and other land	$	1,039	$	-	$	235	$	1,274	$	43,400	$	44,674
Commercial and industrial		669		230		700		1,599		171,425		173,024
Multi-family residential		103		-		946		1,049		114,112		115,161
Single family non-owner occupied		925		488		2,144		3,557		184,226		187,783
Non-farm, non-residential		601		296		3,368		4,265		730,528		734,793
Agricultural		70		189		88		347		9,402		9,749
Farmland		43		-		457		500		19,261		19,761
Consumer real estate loans
Home equity lines		649		380		425		1,454		95,072		96,526
Single family owner occupied		5,317		2,265		3,891		11,473		649,581		661,054
Owner occupied construction		82		-		-		82		17,638		17,720
Consumer and other loans
Consumer loans		2,637		746		651		4,034		116,339		120,373
Other		-		-		-		-		6,014		6,014
Total loans	$	12,135	$	4,594	$	12,905	$	29,634	$	2,156,998	$	2,186,632

In estimating estimated credit losses, ASC 326 prescribes that if foreclosure is probable, a collateral dependent asset (“CDA”) is required to be measured at the fair value of the collateral, but as a practical expedient, if foreclosure is not probable, fair value measurement is optional. For those CDA loans measured at the fair value of collateral, a credit loss expense is recorded for loan amounts in excess of fair value. The table below summarizes collateral dependent loans, by type of collateral, and the extent to which they are collateralized during the period.

(Amounts in thousands)	March 31, 2021		Collateral Coverage		%
Commercial Real Estate
Hotel	$	-	$	-		-
Office		-		-		-
Other		2,480		3,126		126.05	%
Retail		-		-		-
Multi-Family
Industrial		-		-		-
Office		-		-		-
Other		686		723		105	%
Commercial and industrial
Industrial		-		-		-
Other		-		-		-
Home equity loans		42		-		0.00	%
Consumer owner occupied		189		-		0.00	%
Consumer		-		-		-
Total collateral dependent loans	$	3,397	$	3,849		113.31	%

The Company may make concessions in interest rates, loan terms and/or amortization terms when restructuring loans for borrowers experiencing financial difficulty. 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 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, 2021 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.

From March, 2020, through March 31, 2021, the Company had modified a total of 3,812 loans with principal balances totaling $466.59 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. As of March 31, 2021, total COVID-19 loan deferrals stood at $17.48 million.

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

	*March 31, 2021*						*December 31, 2020*
(Amounts in thousands)	*Nonaccrual(1)*		*Accruing*		*Total*		*Nonaccrual(1)*		*Accruing*		*Total*
Commercial loans
Construction, development, and other land	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		353		709		1,062		-		1,326		1,326
Single family non-owner occupied		1,523		1,045		2,568		1,585		1,265		2,850
Non-farm, non-residential		1,388		2,393		3,781		-		2,407		2,407
Consumer real estate loans
Home equity lines		-		75		75		-		77		77
Single family owner occupied		216		4,560		4,776		229		4,927		5,156
Owner occupied construction		-		216		216		-		216		216
Consumer and other loans
Consumer loans		-		29		29		-		30		30
Total TDRs	$	3,480	$	9,027	$	12,507	$	1,814	$	10,248	$	12,062

Allowance for credit losses related to TDRs					$	-					$	-

(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 March 31,*
	*2021*		*2020*
(Amounts in thousands)
Interest income recognized	$	104	$	98

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 March 31,*
	*2021*						*2020*
					*Post-modification*						*Post-modification*
	*Total*		*Pre-modification*		*Recorded*		*Total*		*Pre-modification*		*Recorded*
(Amounts in thousands)	*Contracts*		*Recorded Investment*		*Investment(1)*		*Contracts*		*Recorded Investment*		*Investment(1)*
Below market interest rate and extended payment term
Single family non-owner occupied		-		-		-		1		50		50
Single family owner occupied								-		-		-
Total below market interest rate and extended payment term		-		-		-		1		50		50
Payment deferral
Construction, development, and other land		-		-		-		1		63		63
Commercial and industrial		-		-		-		1		602		602
Single family non-owner occupied		-		-		-		1		529		529
Non-farm, non-residential		1		1,390		1,390		1		577		577
Single family owner occupied		-		-		-		2		672		672
Total principal deferral		1		1,390		1,390		6		2,443		2,443
Total		1	$	1,390	$	1,390		7	$	2,493	$	2,493

(1)	Represents the loan balance immediately following modification

There were no payment defaults on loans modified as TDRs restructured within the previous 12 months as of March 31, 2021, and one loan for $209 thousand as of March 31, 2020.

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

	*March 31, 2021*		*December 31, 2020*
(Amounts in thousands)
OREO	$	1,740	$	2,083

OREO secured by residential real estate	$	645	$	769
Residential real estate loans in the foreclosure process⁽¹⁾		2,900		4,141

(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