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, 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. December 31, 2016 Special (Amounts in thousands) Pass Mention Substandard Doubtful Loss Total Non-covered Commercial loans Construction, development, and other land $ 55,188 $ 980 $ 780 $ — $ — $ 56,948 Commercial and industrial 87,581 3,483 1,137 — 3 92,204 Multi-family residential 126,468 6,992 768 — — 134,228 Single family non-owner 131,934 5,466 5,565 — — 142,965 Non-farm, non-residential 579,134 10,236 9,102 202 — 598,674 Agricultural 5,839 164 — — — 6,003 Farmland 28,887 1,223 1,619 — — 31,729 Consumer real estate loans Home equity lines 104,033 871 1,457 — — 106,361 Single family owner occupied 475,402 4,636 20,381 472 — 500,891 Owner occupied construction 43,833 — 702 — — 44,535 Consumer and other loans Consumer loans 77,218 11 216 — — 77,445 Other 3,971 — — — — 3,971 Total non-covered 1,719,488 34,062 41,727 674 3 1,795,954 Covered loans Commercial loans Construction, development, and other land 2,768 803 999 — — 4,570 Commercial and industrial 882 — 13 — — 895 Multi-family residential — — 8 — — 8 Single family non-owner 796 63 103 — — 962 Non-farm, non-residential 6,423 537 552 — — 7,512 Agricultural 25 — — — — 25 Farmland 132 — 265 — — 397 Consumer real estate loans Home equity lines 14,283 20,763 771 — — 35,817 Single family owner occupied 4,601 928 1,200 — — 6,729 Consumer and other loans Consumer loans 79 — — — — 79 Total covered loans 29,989 23,094 3,911 — — 56,994 Total loans $ 1,749,477 $ 57,156 $ 45,638 $ 674 $ 3 $ 1,852,948 December 31, 2015 Special (Amounts in thousands) Pass Mention Substandard Doubtful Loss Total Non-covered 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 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 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 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 dates indicated: December 31, 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 Construction, development, and other land $ 33 $ 35 $ — $ 57 $ 57 $ — Commercial and industrial 346 383 — 16 23 — Multi-family residential 294 369 — 84 94 — Single family non-owner 3,084 3,334 — 2,095 2,239 — Non-farm, non-residential 3,829 4,534 — 10,369 11,055 — Agricultural — — — — — — Farmland 1,161 1,188 — 310 326 — Consumer real estate loans Home equity lines 913 968 — 868 898 — Single family owner occupied 11,779 12,630 — 11,289 11,996 — Owner occupied construction 573 589 — 243 243 — Consumer and other loans Consumer loans 62 103 — 71 74 — Other — — — — — — Total impaired loans with no allowance 22,074 24,133 — 25,402 27,005 — Impaired loans with a related allowance Commercial loans Single family non-owner 351 351 31 619 623 124 Non-farm, non-residential — — — 5,667 5,673 1,568 Farmland 430 430 18 — — — Consumer real estate loans Single family owner occupied 4,118 4,174 770 4,899 4,907 672 Owner occupied construction — — — 349 355 7 Total impaired loans with an allowance 4,899 4,955 819 11,534 11,558 2,371 Total impaired loans (1) $ 26,973 $ 29,088 $ 819 $ 36,936 $ 38,563 $ 2,371 (1) Includes loans totaling $16.89 million as of December 31, 2016, and $14.22 million as of December 31, 2015, 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: Year Ended December 31, 2016 2015 2014 (Amounts in thousands) Interest Average Interest Average Interest Average Impaired loans with no related allowance: Commercial loans Construction, development, and other land $ 22 $ 344 $ 5 $ 481 $ 8 $ 607 Commercial and industrial 16 646 — 324 18 1,627 Multi-family residential 21 308 4 269 21 162 Single family non-owner 178 3,076 88 2,140 60 1,629 Non-farm, non-residential 307 8,573 312 11,677 353 8,248 Agricultural — — — — — 1 Farmland 55 437 16 195 6 315 Consumer real estate loans Home equity lines 30 1,223 36 813 22 686 Single family owner occupied 343 12,330 356 12,708 404 11,486 Owner occupied construction 9 497 10 359 5 259 Consumer and other loans Consumer loans 5 60 8 98 5 108 Total impaired loans with no related allowance 986 27,494 835 29,064 902 25,128 Impaired loans with a related allowance: Commercial loans Commercial and industrial — — — — 47 2,199 Multi-family residential — — — — 23 4,190 Single family non-owner 23 518 25 575 2 369 Non-farm, non-residential 215 3,831 65 4,987 31 3,386 Farmland 14 108 — — — — Consumer real estate loans Home equity lines — — — — 1 57 Single family owner occupied 118 4,452 26 3,731 48 3,897 Owner occupied construction — 87 1 178 — — Total impaired loans with a related allowance 370 8,996 117 9,471 152 14,098 Total impaired loans $ 1,356 $ 36,490 $ 952 $ 38,535 $ 1,054 $ 39,226 The following tables provide information on impaired PCI loan pools as of and for the dates indicated: December 31, (Amounts in thousands, except impaired loan pools) 2016 2015 Unpaid principal balance $ 1,086 $ 3,759 Recorded investment 1,085 2,834 Allowance for loan losses related to PCI loan pools 12 54 Impaired PCI loan pools 1 2 Year Ended December 31, (Amounts in thousands) 2016 2015 2014 Interest income recognized $ 142 $ 364 $ 3,081 Average recorded investment 1,929 3,309 30,007 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: December 31, 2016 2015 (Amounts in thousands) Non-covered Covered Total Non-covered Covered Total Commercial loans Construction, development, and other land $ 72 $ 32 $ 104 $ 39 $ 54 $ 93 Commercial and industrial 332 13 345 — 16 16 Multi-family residential 294 — 294 84 — 84 Single family non-owner 1,242 24 1,266 1,850 29 1,879 Non-farm, non-residential 3,295 30 3,325 7,150 39 7,189 Farmland 1,591 — 1,591 234 — 234 Consumer real estate loans Home equity lines 705 400 1,105 825 413 1,238 Single family owner occupied 7,924 109 8,033 7,245 96 7,341 Owner occupied construction 336 — 336 349 — 349 Consumer and other loans Consumer loans 63 — 63 71 — 71 Total nonaccrual loans $ 15,854 $ 608 $ 16,462 $ 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. There were no non-covered December 31, 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 Commercial loans Construction, development, and other land $ 33 $ 5 $ 17 $ 55 $ 56,893 $ 56,948 Commercial and industrial 174 30 149 353 91,851 92,204 Multi-family residential 163 — 281 444 133,784 134,228 Single family non-owner 1,302 159 835 2,296 140,669 142,965 Non-farm, non-residential 1,235 332 2,169 3,736 594,938 598,674 Agricultural — 5 — 5 5,998 6,003 Farmland 224 343 565 1,132 30,597 31,729 Consumer real estate loans Home equity lines 78 136 658 872 105,489 106,361 Single family owner occupied 4,777 2,408 3,311 10,496 490,395 500,891 Owner occupied construction 342 336 — 678 43,857 44,535 Consumer and other loans Consumer loans 371 90 15 476 76,969 77,445 Other — — — — 3,971 3,971 Total non-covered 8,699 3,844 8,000 20,543 1,775,411 1,795,954 Covered loans Commercial loans Construction, development, and other land 434 — 32 466 4,104 4,570 Commercial and industrial — — — — 895 895 Multi-family residential — — — — 8 8 Single family non-owner 24 — — 24 938 962 Non-farm, non-residential 32 — — 32 7,480 7,512 Agricultural — — — — 25 25 Farmland — — — — 397 397 Consumer real estate loans Home equity lines 108 146 62 316 35,501 35,817 Single family owner occupied 58 — 39 97 6,632 6,729 Owner occupied construction — — — — — — Consumer and other loans Consumer loans — — — — 79 79 Total covered loans 656 146 133 935 56,059 56,994 Total loans $ 9,355 $ 3,990 $ 8,133 $ 21,478 $ 1,831,470 $ 1,852,948 December 31, 2015 30 - 59 Days Past Due 60 - 89 Days Past Due 90+ Days Past Due Total Past Due Current Loans Total Loans (Amounts in thousands) Non-covered 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 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 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 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 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 December 31, 2016, or December 31, 2015. The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated: December 31, 2016 2015 (Amounts in thousands) Nonaccrual (1) Accruing Total Nonaccrual (1) Accruing Total Commercial loans Single family non-owner $ 38 $ 892 $ 930 $ 130 $ 820 $ 950 Non-farm, non-residential — 4,160 4,160 — 4,600 4,600 Consumer real estate loans Home equity lines — 158 158 127 43 170 Single family owner occupied 905 7,503 8,408 733 8,256 8,989 Owner occupied construction 341 239 580 349 243 592 Total TDRs $ 1,284 $ 12,952 $ 14,236 $ 1,339 $ 13,962 $ 15,301 Allowance for loan losses related to TDRs $ 670 $ 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: Year Ended December 31, (Amounts in thousands) 2016 2015 2014 Interest income recognized $ 424 $ 608 $ 597 The following table presents 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. Year Ended December 31, 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 There were no payment defaults on loans modified as TDRs that were restructured within the previous 12 months as of December 31, 2016 and 2015. The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated: December 31, (Amounts in thousands) 2016 2015 Non-covered $ 5,109 $ 4,873 Covered OREO 276 4,034 Total OREO $ 5,385 $ 8,907 Non-covered $ 1,746 $ 2,677 Residential real estate loans in the foreclosure process (1) 2,539 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. |