Credit Quality | Note 4. 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 table presents the recorded investment and related information for loans considered to be impaired, excluding PCI loans, as of the periods indicated: September 30, 2015 December 31, 2014 (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 $ 783 $ 785 $ — $ 466 $ 466 $ — Non-farm, non-residential 8,772 9,159 — 5,705 6,049 — Consumer real estate loans Single family owner occupied 1,334 1,404 — 3,397 3,494 — Owner occupied construction — — — — — — Total impaired loans with no allowance 10,889 11,348 — 9,568 10,009 — Impaired loans with a related allowance: Commercial loans Single family non-owner occupied 621 624 117 367 367 45 Non-farm, non-residential 5,359 5,374 1,711 3,772 3,772 1,000 Consumer real estate loans Single family owner occupied 4,798 4,817 760 2,341 2,512 437 Owner occupied construction 353 356 53 — — — Total impaired loans with an allowance 11,131 11,171 2,641 6,480 6,651 1,482 Total impaired loans $ 22,020 $ 22,519 $ 2,641 $ 16,048 $ 16,660 $ 1,482 The following tables present the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, in the periods indicated: Three Months Ended September 30, 2015 2014 (Amounts in thousands) Average Interest Average Interest Impaired loans with no related allowance: Commercial loans Commercial and industrial $ — $ — $ 1,258 $ — Single family non-owner occupied 792 27 321 7 Non-farm, non-residential 8,878 72 5,971 — Farmland — — — — Consumer real estate loans Single family owner occupied 1,353 — 2,880 10 Owner occupied construction — — — — Total impaired loans with no allowance 11,023 99 10,430 17 Impaired loans with a related allowance: Commercial loans Multi-family residential — — 5,568 1 Single family non-owner occupied 629 — 369 1 Non-farm, non-residential 5,417 15 4,386 6 Consumer real estate loans Single family owner occupied 4,847 13 2,528 8 Owner occupied construction 357 1 — — Total impaired loans with an allowance 11,250 29 12,851 16 Total impaired loans $ 22,273 $ 128 $ 23,281 $ 33 Nine Months Ended September 30, 2015 2014 (Amounts in thousands) Average Interest Average Interest Impaired loans with no related allowance: Commercial loans Commercial and industrial $ — $ — $ 614 $ 17 Single family non-owner occupied 571 28 247 8 Non-farm, non-residential 8,834 295 6,089 89 Farmland — — 241 11 Consumer real estate loans Home equity lines — — 88 2 Single family owner occupied 2,578 100 2,179 61 Owner occupied construction 117 — — — Total impaired loans with no allowance 12,100 423 9,458 188 Impaired loans with a related allowance: Commercial loans Commercial and industrial — — 2,932 47 Multi-family residential — — 5,586 23 Single family non-owner occupied 558 22 370 2 Non-farm, non-residential 4,740 51 4,404 31 Consumer real estate loans Home equity lines — — 76 1 Single family owner occupied 3,325 26 3,216 42 Owner occupied construction 119 1 — — Total impaired loans with an allowance 8,742 100 16,584 146 Total impaired loans $ 20,842 $ 523 $ 26,042 $ 334 The Company determined that two of the six open PCI loan pools were impaired as of September 30, 2015, compared to two of seven impaired pools as of December 31, 2014. The following tables present additional information related to the impaired loan pools as of the dates, and in the periods, indicated: September 30, 2015 December 31, 2014 (Amounts in thousands) Recorded investment $ 3,015 $ 14,607 Unpaid principal balance 3,978 31,169 Allowance for loan losses 20 58 Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 (Amounts in thousands) Interest income recognized $ 96 $ 82 $ 273 $ 2,154 Average recorded investment 3,045 1,416 3,464 35,063 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: September 30, 2015 (Amounts in thousands) Pass Special Substandard Doubtful Loss Total Non-covered loans Commercial loans Construction, development, and other land $ 43,843 $ 684 $ 1,403 $ — $ — $ 45,930 Commercial and industrial 83,525 555 1,239 — — 85,319 Multi-family residential 79,400 13,044 912 — — 93,356 Single family non-owner occupied 135,722 3,502 5,501 — — 144,725 Non-farm, non-residential 451,724 8,836 18,737 — — 479,297 Agricultural 2,386 25 3 — — 2,414 Farmland 25,229 1,248 658 — — 27,135 Consumer real estate loans Home equity lines 105,104 1,224 1,327 — — 107,655 Single family owner occupied 464,709 6,865 20,583 — — 492,157 Owner occupied construction 39,413 — 728 — — 40,141 Consumer and other loans Consumer loans 74,832 64 188 — — 75,084 Other 7,058 — — — — 7,058 Total non-covered loans 1,512,945 36,047 51,279 — — 1,600,271 Covered loans Commercial loans Construction, development, and other land 4,189 2,138 1,246 — — 7,573 Commercial and industrial 1,285 16 25 — — 1,326 Multi-family residential 492 — 207 — — 699 Single family non-owner occupied 1,838 576 485 — — 2,899 Non-farm, non-residential 10,223 1,884 3,605 — — 15,712 Agricultural 35 — — — — 35 Farmland 373 — 283 — — 656 Consumer real estate loans Home equity lines 18,508 31,835 862 — — 51,205 Single family owner occupied 6,123 1,693 1,920 — — 9,736 Owner occupied construction 115 63 100 — — 278 Consumer and other loans Consumer loans 84 — — — — 84 Other — — — — — — Total covered loans 43,265 38,205 8,733 — — 90,203 Total loans $ 1,556,210 $ 74,252 $ 60,012 $ — $ — $ 1,690,474 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 Other — — — — — — 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: September 30, 2015 December 31, 2014 (Amounts in thousands) Non-covered Covered Total Non-covered Covered Total Commercial loans Construction, development, and other land $ 99 $ 68 $ 167 $ — $ 18 $ 18 Commercial and industrial 72 16 88 123 34 157 Multi-family residential 72 — 72 245 — 245 Single family non-owner occupied 1,763 — 1,763 601 77 678 Non-farm, non-residential 6,872 39 6,911 2,334 1,317 3,651 Agricultural — — — 4 — 4 Farmland 151 — 151 — — — Consumer real estate loans Home equity lines 544 453 997 792 204 996 Single family owner occupied 7,097 239 7,336 6,389 682 7,071 Owner occupied construction 353 — 353 — 106 106 Consumer and other loans Consumer loans 77 — 77 68 — 68 Total nonaccrual loans $ 17,100 $ 815 $ 17,915 $ 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 September 30, 2015, or as of December 31, 2014. September 30, 2015 (Amounts in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due 90+ Days Past Due Total Current Loans Total Loans Non-covered loans Commercial loans Construction, development, and other land $ 42 $ 11 $ 99 $ 152 $ 45,778 $ 45,930 Commercial and industrial 55 — 55 110 85,209 85,319 Multi-family residential 72 77 — 149 93,207 93,356 Single family non-owner occupied 241 441 1,134 1,816 142,909 144,725 Non-farm, non-residential 800 42 5,473 6,315 472,982 479,297 Agricultural — — — — 2,414 2,414 Farmland 71 69 151 291 26,844 27,135 Consumer real estate loans Home equity lines 320 24 458 802 106,853 107,655 Single family owner occupied 2,802 1,743 3,209 7,754 484,403 492,157 Owner occupied construction — — — — 40,141 40,141 Consumer and other loans Consumer loans 435 42 25 502 74,582 75,084 Other — — — — 7,058 7,058 Total non-covered loans 4,838 2,449 10,604 17,891 1,582,380 1,600,271 Covered loans Commercial loans Construction, development, and other land 93 2 42 137 7,436 7,573 Commercial and industrial — 9 16 25 1,301 1,326 Multi-family residential — — — — 699 699 Single family non-owner occupied — 3 — 3 2,896 2,899 Non-farm, non-residential 15 108 39 162 15,550 15,712 Agricultural — — — — 35 35 Farmland — — — — 656 656 Consumer real estate loans Home equity lines 454 106 8 568 50,637 51,205 Single family owner occupied — 93 14 107 9,629 9,736 Owner occupied construction 186 20 — 206 72 278 Consumer and other loans Consumer loans — — — — 84 84 Other — — — — — — Total covered loans 748 341 119 1,208 88,995 90,203 Total loans $ 5,586 $ 2,790 $ 10,723 $ 19,099 $ 1,671,375 $ 1,690,474 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 Other — — — — — — 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 troubled debt restructurings (“TDRs”) totaled $641 thousand as of September 30, 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: Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 (Amounts in thousands) Interest income recognized $ 148 $ 188 $ 456 $ 466 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 September 30, 2015, or December 31, 2014. The following table presents loans modified as TDRs, by loan class, segregated by accrual status, as of the dates indicated: September 30, 2015 December 31, 2014 (Amounts in thousands) Nonaccrual (1) Accruing Total Nonaccrual (1) Accruing Total Commercial loans Single family non-owner occupied $ 132 $ 824 $ 956 $ — $ 1,088 $ 1,088 Non-farm, non-residential — 4,632 4,632 83 4,743 4,826 Consumer real estate loans Home equity lines — 44 44 — 47 47 Single family owner occupied 338 8,296 8,634 471 8,412 8,883 Owner occupied construction 353 243 596 — 244 244 Total TDRs $ 823 $ 14,039 $ 14,862 $ 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 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, 2015 2014 (Amounts in thousands) Total Pre-Modification Post-Modification Total Pre-Modification Post-Modification Below market interest rate Single family owner occupied — $ — $ — 3 $ 1,715 $ 1,715 Extended payment term Single family non-owner occupied — — — 1 468 468 Below market interest rate and extended payment term Single family owner occupied 4 307 307 2 84 84 Total 4 $ 307 $ 307 6 $ 2,267 $ 2,267 Nine Months Ended September 30, 2015 2014 (Amounts in thousands) Total Pre-Modification Post-Modification Total Pre-Modification Post-Modification 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 owner occupied 5 342 342 5 487 487 Total 5 $ 342 $ 342 12 $ 3,353 $ 3,353 The following tables present 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, 2015 2014 (Amounts in thousands) Total Pre-Modification Total Pre-Modification Commercial loans Single family non-owner occupied 1 $ 78 — $ — Consumer real estate loans Single family owner occupied — — 2 312 Owner occupied construction — — — — Total 1 $ 78 2 $ 312 Nine Months Ended September 30, 2015 2014 (Amounts in thousands) Total Pre-Modification Total Pre-Modification Commercial loans Single family non-owner occupied 1 $ 78 — $ — Consumer real estate loans Single family owner occupied — — 2 312 Owner occupied construction 1 353 — — Total 2 $ 431 2 $ 312 Other real estate owned (“OREO”) consists of properties acquired through foreclosure. The following table presents information related to OREO as of the dates indicated: September 30, 2015 December 31, 2014 (Amounts in thousands) Non-covered OREO $ 5,088 $ 6,638 Covered OREO 4,079 6,324 Total OREO $ 9,167 $ 12,962 Non-covered OREO secured by residential real estate $ 2,280 $ 6,155 Residential real estate loans in the foreclosure process (1) 3,138 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. |