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 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 Pre-modification Post-modification Total Pre-modification Post-modification 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 Pre-modification Post-modification Total Pre-modification Post-modification 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 Post-modification Total Post-modification Commercial loans Single family non-owner occupied — $ — 1 $ 78 Total — $ — 1 $ 78 Nine Months Ended September 30, 2016 2015 (Amounts in thousands) Total Post-modification Total Post-modification 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 |