Loans

3 Months Ended

Mar. 31, 2014

Loans

Note 4 – Loans

Loans were as follows:	March 31, 2014			December 31, 2013
	(in thousands)
Commercial	$	61,688		$	52,878
Commercial Real Estate:
Construction		41,772			43,326
Farmland		66,403			71,189
Nonfarm nonresidential		222,896			232,026
Residential Real Estate:
Multi-family		38,721			46,858
1-4 Family		210,721			228,505
Consumer		13,631			14,365
Agriculture		26,348			19,199
Other		411			980
Subtotal		682,591			709,326
Less: Allowance for loan losses		(25,415	)		(28,124	)
Loans, net	$	657,176		$	681,202

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014 and 2013:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
March 31, 2014:
Beginning balance	$	3,221		$	16,414		$	7,762		$	416		$	305		$	6		$	28,124
Provision for loan losses		445			(1,127	)		534			19			113			16			—
Loans charged off		(146	)		(1,474	)		(1,308	)		(128	)		(9	)		(17	)		(3,082	)
Recoveries		88			116			83			76			6			4			373
Ending balance	$	3,608		$	13,929		$	7,071		$	383		$	415		$	9		$	25,415
March 31, 2013:
Beginning balance	$	4,402		$	34,768		$	16,235		$	857		$	403		$	15		$	56,680
Provision for loan losses		1,438			(445	)		(450	)		86			(178	)		(1	)		450
Loans charged off		(976	)		(12,312	)		(4,339	)		(318	)		(17	)		—			(17,962	)
Recoveries		126			158			94			91			202			—			671
Ending balance	$	4,990		$	22,169		$	11,540		$	716		$	410		$	14		$	39,839

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2014:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	452	$	1,546	$	451	$	4	$	—	$	—	$	2,453
Collectively evaluated for impairment		3,156		12,383		6,620		379		415		9		22,962
Total ending allowance balance	$	3,608	$	13,929	$	7,071	$	383	$	415	$	9	$	25,415
Loans:
Loans individually evaluated for impairment	$	4,799	$	86,843	$	29,986	$	46	$	299	$	185	$	122,158
Loans collectively evaluated for impairment		56,889		244,228		219,456		13,585		26,049		226		560,433
Total ending loans balance	$	61,688	$	331,071	$	249,442	$	13,631	$	26,348	$	411	$	682,591

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2013:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	290	$	2,345	$	827	$	9	$	—	$	—	$	3,471
Collectively evaluated for impairment		2,931		14,069		6,935		407		305		6		24,653
Total ending allowance balance	$	3,221	$	16,414	$	7,762	$	416	$	305	$	6	$	28,124
Loans:
Loans individually evaluated for impairment	$	4,995	$	94,330	$	49,512	$	93	$	322	$	631	$	149,883
Loans collectively evaluated for impairment		47,883		252,211		225,851		14,272		18,877		349		559,443
Total ending loans balance	$	52,878	$	346,541	$	275,363	$	14,365	$	19,199	$	980	$	709,326

Impaired Loans

Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2014:

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	2,047	$	1,473	$	—	$	1,503	$	1	$	1
Commercial real estate:
Construction		74		—		—		19		—		—
Farmland		3,320		3,024		—		3,461		17		17
Nonfarm nonresidential		4,526		1,171		—		1,287		—		—
Residential real estate:
Multi-family		92		92		—		242		—		—
1-4 Family		12,152		8,382		—		9,233		169		169
Consumer		—		—		—		4		—		—
Agriculture		377		299		—		310		3		3
Other		79		79		—		46		7		7
With An Allowance Recorded:
Commercial		3,586		3,326		452		3,394		18		—
Commercial real estate:
Construction		8,652		7,798		154		8,531		9		—
Farmland		5,629		3,731		—		3,985		—		—
Nonfarm nonresidential		86,595		71,119		1,392		73,304		291		—
Residential real estate:
Multi-family		5,174		4,789		260		8,453		37		—
1-4 Family		18,526		16,723		191		21,821		136		—
Consumer		45		46		4		65		1		—
Agriculture		—		—		—		—		—		—
Other		351		106		—		362		—		—
Total	$	151,225	$	122,158	$	2,453	$	136,020	$	689	$	197

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2013:

	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	2,131	$	1,533	$	—	$	1,622	$	30	$	30
Commercial real estate:
Construction		64		38		—		467		164		164
Farmland		4,074		3,898		—		4,259		268		268
Other		1,568		1,404		—		1,724		367		366
Residential real estate:
Multi-family		444		392		—		541		3		3
1-4 Family		11,011		10,083		—		11,533		115		116
Consumer		9		9		—		21		—		—
Agriculture		401		322		—		213		—		—
Other		14		13		—		10		11		11
With An Allowance Recorded:
Commercial		3,734		3,462		290		3,905		99		—
Commercial real estate:
Construction		10,409		9,264		218		20,173		88		—
Farmland		6,117		4,238		65		5,579		37		—
Other		94,508		75,488		2,062		77,726		1,324		—
Residential real estate:
Multi-family		13,883		12,117		393		13,121		208		—
1-4 Family		31,327		26,920		434		27,755		557		—
Consumer		84		84		9		134		3		—
Agriculture		—		—		—		2		—		—
Other		861		618		—		539		17		—
Total	$	180,639	$	149,883	$	3,471	$	169,324	$	3,291	$	958

Troubled Debt Restructuring

A troubled debt restructuring (TDR) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Company’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Company has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2014 and December 31, 2013:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2014
Commercial
Rate reduction	$	1,905	$	—	$	1,905
Principal deferral		—		869		869
Commercial Real Estate:
Construction
Rate reduction		274		6,204		6,478
Principal deferral		354		—		354
Farmland
Principal deferral		—		2,365		2,365
Nonfarm nonresidential
Rate reduction		21,567		18,925		40,492
Principal deferral		685		—		685
Interest only payments		2,427		1,489		3,916
Residential Real Estate:
Multi-family
Rate reduction		4,323		—		4,323
1-4 Family
Rate reduction		10,233		788		11,021
Consumer
Rate reduction		45		—		45
Total TDRs	$	41,813	$	30,640	$	72,453

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2013
Commercial
Rate reduction	$	1,933	$	—	$	1,933
Principal deferral		—		869		869
Commercial Real Estate:
Construction
Rate reduction		275		6,345		6,620
Principal deferral		499		—		499
Farmland
Rate reduction		150		—		150
Principal deferral		—		2,365		2,365
Other
Rate reduction		22,457		21,235		43,692
Principal deferral		691		—		691
Interest only payments		2,439		1,489		3,928
Residential Real Estate:
Multi-family
Rate reduction		4,354		6,655		11,009
Interest only payments		641		—		641
1-4 Family
Rate reduction		10,312		7,958		18,270
Consumer
Rate reduction		84		—		84
Other
Rate reduction		511		—		511
Total TDRs	$	44,346	$	46,916	$	91,262

At March 31, 2014 and December 31, 2013, 58% and 49%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $2.2 million and $2.9 million in reserves to borrowers whose loan terms have been modified in TDRs as of March 31, 2014, and December 31, 2013, respectively. The Company has committed to lend additional amounts totaling $262,000 and $261,000 as of March 31, 2014 and December 31, 2013, respectively, to borrowers with outstanding loans classified as TDRs.

No TDR loan modifications occurred during the three months ended March 31, 2014. The following tables present a summary of the types of TDR loan modifications by portfolio type that occurred during the three months ended March 31, 2013:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2013
Commercial:
Rate reduction	$	47	$	—	$	47
Commercial Real Estate:
Construction
Rate reduction		—		1,291		1,291
Other
Rate reduction		1,428		—		1,428
Residential Real Estate:
1-4 Family
Rate reduction		819		—		819
Consumer:
Rate reduction		40		86		126
Total TDRs	$	2,334	$	1,377	$	3,711

No TDR loan modifications occurred during the three months ended March 31, 2014. As of March 31, 2013, 63% of the Company’s TDRs that occurred during the three months ended March 31, 2013 were performing according to their modified terms. The Company allocated $203,000 in reserves to borrowers whose loan terms have been modified during the three months ended March 31, 2013. For modifications occurring during the three month period ended March 31, 2013, the post-modification balances approximate the pre-modification balances.

During the first three months of 2014, no TDRs defaulted on their restructured loan within the 12 month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. During the first three months of 2013, approximately $1.6 million TDRs defaulted on their restructured loan within the 12 month period following the loan modification. These defaults consisted of $1.5 million in commercial real estate loans and $86,000 in consumer loans.

Nonperforming Loans

Nonperforming loans include impaired loans not on accrual and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.

The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of March 31, 2014, and December 31, 2013:

	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
	(in thousands)
Commercial	$	2,735	$	2,886	$	—	$	—
Commercial Real Estate:
Construction		7,169		8,528		—		—
Farmland		6,755		7,844		—		—
Nonfarm nonresidential		44,771		48,447		—		—
Residential Real Estate:
Multi-family		558		7,513		—		—
1-4 Family		14,872		26,098		—		230
Consumer		—		9		—		2
Agriculture		299		322		—		—
Other		185		120		—		—
Total	$	77,344	$	101,767	$	—	$	232

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
March 31, 2014
Commercial	$	320	$	49	$	—	$	2,735	$	3,104
Commercial Real Estate:
Construction		—		—		—		7,169		7,169
Farmland		347		208		—		6,755		7,310
Other		2,217		347		—		44,771		47,335
Residential Real Estate:
Multi-family		—		—		—		558		558
1-4 Family		2,523		505		—		14,872		17,900
Consumer		142		52		—		—		194
Agriculture		118		71		—		299		488
Other		—		—		—		185		185
Total	$	5,667	$	1,232	$	—	$	77,344	$	84,243

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
December 31, 2013
Commercial	$	156	$	123	$	—	$	2,886	$	3,165
Commercial Real Estate:
Construction		261		—		—		8,528		8,789
Farmland		484		41		—		7,844		8,369
Other		4,375		—		—		48,447		52,822
Residential Real Estate:
Multi-family		1,181		—		—		7,513		8,694
1-4 Family		4,059		577		230		26,098		30,964
Consumer		145		34		2		9		190
Agriculture		35		—		—		322		357
Other		—		—		—		120		120
Total	$	10,696	$	775	$	232	$	101,767	$	113,470

Credit Quality Indicators

We categorize loans into risk categories at origination based upon original underwriting. Thereafter, we categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. We have no non-rated loans. The following definitions are used for risk ratings:

Watch – Loans classified as watch are those loans which have experienced a potentially adverse development which necessitates increased monitoring.

Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.

Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility we will sustain some losses if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of March 31, 2014, and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
March 31, 2014
Commercial	$	47,562	$	5,231	$	—	$	8,895	$	—	$	61,688
Commercial Real Estate:
Construction		17,449		12,229		—		12,094		—		41,772
Farmland		46,222		8,037		1,515		10,629		—		66,403
Nonfarm nonresidential		108,047		35,572		762		78,515		—		222,896
Residential Real Estate:
Multi-family		23,374		9,304		—		6,043		—		38,721
1-4 Family		135,175		32,219		1,790		41,537		—		210,721
Consumer		12,402		643		2		584		—		13,631
Agriculture		24,688		935		—		725		—		26,348
Other		225		1		—		185		—		411
Total	$	415,144	$	104,171	$	4,069	$	159,207	$	—	$	682,591

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2013
Commercial	$	35,438	$	8,517	$	329	$	8,594	$	—	$	52,878
Commercial Real Estate:
Construction		16,706		10,771		2,277		13,572		—		43,326
Farmland		46,909		9,121		1,735		13,424		—		71,189
Other		93,327		51,522		734		86,443		—		232,026
Residential Real Estate:
Multi-family		16,506		17,320		—		13,032		—		46,858
1-4 Family		130,833		43,785		784		53,103		—		228,505
Consumer		12,718		968		6		673		—		14,365
Agriculture		16,742		1,802		—		655		—		19,199
Other		350		510		—		120		—		980
Total	$	369,529	$	144,316	$	5,865	$	189,616	$	—	$	709,326

During the first quarter of 2014, management instituted a new risk category within its pass classification. The purpose was to better identify certain loans where the borrower’s sustained satisfactory repayment history was deemed a more relevant predictor of future loss than certain underwriting criteria at origination. The establishment of this new pass risk category helps to ensure the watch risk category remains transitory and event driven in nature. A total of $24.2 million in commercial, $8.5 million in residential, and $2.2 million in agriculture loans were reclassified from watch to the new pass risk category during the quarter.