Credit Quality | 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 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 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. June 30, 2016 (Amounts in thousands) Pass Special Substandard Doubtful Loss Total Non-covered loans Commercial loans Construction, development, and other land $ 57,254 $ 976 $ 741 $ — $ — $ 58,971 Commercial and industrial 87,974 3,575 1,242 — — 92,791 Multi-family residential 100,210 8,593 848 — — 109,651 Single family non-owner occupied 142,725 4,328 6,255 — — 153,308 Non-farm, non-residential 523,062 16,241 9,601 867 — 549,771 Agricultural 4,373 48 — — — 4,421 Farmland 25,098 1,911 506 — — 27,515 Consumer real estate loans Home equity lines 103,855 1,015 1,647 — — 106,517 Single family owner occupied 477,588 6,232 19,725 512 — 504,057 Owner occupied construction 42,474 — 712 — — 43,186 Consumer and other loans Consumer loans 75,475 42 186 — — 75,703 Other 7,507 — — — — 7,507 Total non-covered loans 1,647,595 42,961 41,463 1,379 — 1,733,398 Covered loans Commercial loans Construction, development, and other land 3,163 1,237 1,087 — — 5,487 Commercial and industrial 954 — 19 — — 973 Multi-family residential — — 74 — — 74 Single family non-owner occupied 1,488 66 312 — — 1,866 Non-farm, non-residential 7,612 697 1,261 — — 9,570 Agricultural 26 — — — — 26 Farmland 345 — 273 — — 618 Consumer real estate loans Home equity lines 16,029 25,424 801 — — 42,254 Single family owner occupied 4,132 1,910 1,390 — — 7,432 Owner occupied construction 107 — 97 — — 204 Consumer and other loans Consumer loans 81 — — — — 81 Total covered loans 33,937 29,334 5,314 — — 68,585 Total loans $ 1,681,532 $ 72,295 $ 46,777 $ 1,379 $ — $ 1,801,983 December 31, 2015 (Amounts in thousands) Pass Special 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: June 30, 2016 December 31, 2015 (Amounts in thousands) Recorded Unpaid Related Recorded Unpaid Related Impaired loans with no related allowance Commercial loans Single family non-owner occupied $ 457 $ 457 $ — $ 782 $ 783 $ — Non-farm, non-residential 4,747 4,747 — 8,427 8,427 — Consumer real estate loans Single family owner occupied 724 766 — 1,975 2,067 — Owner occupied construction 343 353 — — — — Total impaired loans with no allowance 6,271 6,323 — 11,184 11,277 — Impaired loans with a related allowance Commercial loans Single family non-owner occupied 678 680 108 619 623 124 Non-farm, non-residential 5,300 5,319 1,518 5,667 5,673 1,568 Consumer real estate loans Single family owner occupied 4,549 4,593 760 4,899 4,907 672 Owner occupied construction — — — 349 355 7 Total impaired loans with an allowance 10,527 10,592 2,386 11,534 11,558 2,371 Total impaired loans $ 16,798 $ 16,915 $ 2,386 $ 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 June 30, Six Months Ended June 30, 2016 2015 2016 2015 (Amounts in thousands) Average Interest Average Interest Average Interest Average Interest Impaired loans with no related allowance Commercial loans Single family non-owner occupied $ 456 $ 7 $ 463 $ 7 $ 617 $ 15 $ 461 $ 16 Non-farm, non-residential 4,757 52 8,831 63 6,374 121 8,812 146 Consumer real estate loans Single family owner occupied 726 — 2,741 16 665 — 3,190 34 Owner occupied construction 343 — 352 5 171 — 176 5 Total impaired loans with no allowance 6,282 59 12,387 91 7,827 136 12,639 201 Impaired loans with a related allowance Commercial loans Single family non-owner occupied 677 6 684 10 517 13 523 17 Non-farm, non-residential 5,307 82 4,738 96 5,333 170 4,401 174 Consumer real estate loans Single family owner occupied 4,550 29 2,754 21 4,755 67 2,564 39 Owner occupied construction — — — — 173 — — — Total impaired loans with an allowance 10,534 117 8,176 127 10,778 250 7,488 230 Total impaired loans $ 16,816 $ 176 $ 20,563 $ 218 $ 18,605 $ 386 $ 20,127 $ 431 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) June 30, 2016 December 31, 2015 Unpaid principal balance $ 1,120 $ 3,759 Recorded investment 1,122 2,834 Allowance for loan losses related to PCI loan pools 12 54 Impaired PCI loan pools 1 2 Three Months Ended June 30, Six Months Ended June 30, (Amounts in thousands) 2016 2015 2016 2015 Interest income recognized $ 35 $ 87 $ 118 $ 177 Average recorded investment 2,666 3,462 2,728 3,677 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, 2016 December 31, 2015 (Amounts in thousands) Non-covered Covered Total Non-covered Covered Total Commercial loans Construction, development, and other land $ 19 $ 20 $ 39 $ 39 $ 54 $ 93 Commercial and industrial 227 15 242 — 16 16 Multi-family residential 65 — 65 84 — 84 Single family non-owner occupied 1,172 27 1,199 1,850 29 1,879 Non-farm, non-residential 6,554 37 6,591 7,150 39 7,189 Farmland 141 — 141 234 — 234 Consumer real estate loans Home equity lines 853 383 1,236 825 413 1,238 Single family owner occupied 7,202 198 7,400 7,245 96 7,341 Owner occupied construction 343 — 343 349 — 349 Consumer and other loans Consumer loans 50 — 50 71 — 71 Total nonaccrual loans $ 16,626 $ 680 $ 17,306 $ 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 $64 thousand as of June 30, 2016. No non-covered accruing loans were contractually past due 90 days or more as of December 31, 2015. June 30, 2016 (Amounts in thousands) 30 - 59 Days 60 - 89 Days 90+ Days Total Current Total Loans Non-covered loans Commercial loans Construction, development, and other land $ 39 $ 15 $ — $ 54 $ 58,917 $ 58,971 Commercial and industrial 303 79 135 517 92,274 92,791 Multi-family residential 297 — 65 362 109,289 109,651 Single family non-owner occupied 460 202 996 1,658 151,650 153,308 Non-farm, non-residential 723 263 2,311 3,297 546,474 549,771 Agricultural — — — — 4,421 4,421 Farmland 92 69 — 161 27,354 27,515 Consumer real estate loans Home equity lines 380 186 706 1,272 105,245 106,517 Single family owner occupied 2,406 1,436 3,485 7,327 496,730 504,057 Owner occupied construction 556 — — 556 42,630 43,186 Consumer and other loans Consumer loans 407 58 22 487 75,216 75,703 Other — — — — 7,507 7,507 Total non-covered loans 5,663 2,308 7,720 15,691 1,717,707 1,733,398 Covered loans Commercial loans Construction, development, and other land 46 41 20 107 5,380 5,487 Commercial and industrial — — — — 973 973 Multi-family residential — — — — 74 74 Single family non-owner occupied 27 — — 27 1,839 1,866 Non-farm, non-residential — — — — 9,570 9,570 Agricultural — — — — 26 26 Farmland — — — — 618 618 Consumer real estate loans Home equity lines 116 69 210 395 41,859 42,254 Single family owner occupied 81 40 75 196 7,236 7,432 Owner occupied construction — — — — 204 204 Consumer and other loans Consumer loans — — — — 81 81 Total covered loans 270 150 305 725 67,860 68,585 Total loans $ 5,933 $ 2,458 $ 8,025 $ 16,416 $ 1,785,567 $ 1,801,983 December 31, 2015 (Amounts in thousands) 30 - 59 Days 60 - 89 Days 90+ Days Total Current 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. No covered loans were recorded as TDRs as of June 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: June 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 529 8,173 8,702 733 8,256 8,989 Owner occupied construction 343 239 582 349 243 592 Total TDRs $ 911 $ 13,677 $ 14,588 $ 1,339 $ 13,962 $ 15,301 Allowance for loan losses related to TDRs $ 544 $ 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 June 30, Six Months Ended June 30, (Amounts in thousands) 2016 2015 2016 2015 Interest income recognized $ 75 $ 160 $ 153 $ 308 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 June 30, 2016 2015 (Amounts in thousands) Total Pre-modification Post-modification Total Pre-modification Post-modification Below market interest rate and extended payment term Single family owner occupied 1 $ 115 $ 115 1 $ 35 $ 35 Total 1 $ 115 $ 115 1 $ 35 $ 35 Six Months Ended June 30, 2016 2015 (Amounts in thousands) Total Pre-modification Post-modification Total Pre-modification Post-modification Below market interest rate and extended payment term Single family owner occupied 1 $ 115 $ 115 1 $ 35 $ 35 Total 1 $ 115 $ 115 1 $ 35 $ 35 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 June 30, 2016 2015 (Amounts in thousands) Total Contracts Post-modification Recorded Investment Total Contracts Post-modification Consumer real estate loans Single family owner occupied — $ — 1 $ 163 Owner occupied construction — — 1 353 Total — $ — 2 $ 516 Six Months Ended June 30, 2016 2015 (Amounts in thousands) Total Contracts Post-modification Total Contracts Post-modification Recorded Investment Consumer real estate loans Single family owner occupied — $ — 1 $ 163 Owner occupied construction — — 1 353 Total — $ — 2 $ 516 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) June 30, 2016 December 31, 2015 Non-covered OREO $ 4,187 $ 4,873 Covered OREO 2,017 4,034 Total OREO $ 6,204 $ 8,907 Non-covered OREO secured by residential real estate $ 1,821 $ 2,677 Residential real estate loans in the foreclosure process (1) 2,743 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. |