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Note 5 - Credit Quality

12 Months Ended

Dec. 31, 2020

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, 2020*
			*Special*
(Amounts in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Total*
Non-covered loans
Commercial loans
Construction, development, and other land	$	36,934	$	4,950	$	2,765	$	—	$	—	$	44,649
Commercial and industrial		160,474		7,031		5,519		—		—		173,024
Multi-family residential		103,291		8,586		3,284		—		—		115,161
Single family non-owner occupied		165,146		9,602		12,838		12		—		187,598
Non-farm, non-residential		568,438		125,907		40,448		—		—		734,793
Agricultural		7,724		1,686		339		—		—		9,749
Farmland		13,527		2,597		3,637		—		—		19,761
Consumer real estate loans												—
Home equity lines		85,316		1,112		3,004		—		—		89,432
Single family owner occupied		622,082		3,594		33,002		—		—		658,678
Owner occupied construction		17,232		201		287		—		—		17,720
Consumer and other loans												—
Consumer loans		118,134		28		2,211		—		—		120,373
Other		6,014		—		—		—		—		6,014
Total non-covered loans		1,904,312		165,294		107,334		12		—		2,176,952
Covered loans
Commercial loans
Construction, development, and other land		—		25		—		—		—		25
Single family non-owner occupied		151		34		—		—		—		185
Consumer real estate loans
Home equity lines		6,396		376		322		—		—		7,094
Single family owner occupied		1,778		265		333		—		—		2,376
Total covered loans		8,325		700		655		—		—		9,680
Total loans	$	1,912,637	$	165,994	$	107,989	$	12	$	—	$	2,186,632

December 31, 2019

Special

(Amounts in thousands)

Pass

Mention

Substandard

Doubtful

Loss

Total

Non-covered loans

Commercial loans

Construction, development, and other land
$ 45,781 $ 2,079 $ 799 $ — $ — $ 48,659

Commercial and industrial
135,651 4,327 2,984 — — 142,962

Multi-family residential
118,045 2,468 1,327 — — 121,840

Single family non-owner occupied
149,916 7,489 5,776 — — 163,181

Non-farm, non-residential
683,481 27,160 16,620 — — 727,261

Agricultural
11,299 122 335 — — 11,756

Farmland
17,609 4,107 1,439 — — 23,155

Consumer real estate loans

Home equity lines
106,246 2,014 1,818 — — 110,078

Single family owner occupied
580,580 17,001 23,116 — — 620,697

Owner occupied construction
16,341 179 721 — — 17,241

Consumer and other loans

Consumer loans
108,065 1,341 621 — — 110,027

Other
4,742 — — — — 4,742

Total non-covered loans
1,977,756 68,287 55,556 — — 2,101,599

Covered loans

Commercial loans

Construction, development, and other land
— 28 — — — 28

Single family non-owner occupied
199 — — — — 199

Non-farm, non-residential
— — 3 — — 3

Consumer real estate loans

Home equity lines
7,177 2,327 349 — — 9,853

Single family owner occupied
2,111 275 392 — — 2,778

Total covered loans
9,487 2,630 744 — — 12,861

Total loans
$ 1,987,243 $ 70,917 $ 56,300 $ — $ — $ 2,114,460

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, 2020

December 31, 2019

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
$ 616 $ 891 $ — $ 552 $ 768 $ —

Commercial and industrial
2,341 2,392 — 576 599 —

Multi-family residential
946 1,593 — 1,254 1,661 —

Single family non-owner occupied
4,816 5,785 — 2,652 3,176 —

Non-farm, non-residential
8,238 9,467 — 4,158 4,762 —

Agricultural
218 226 — 158 164 —

Farmland
1,228 1,311 — 1,437 1,500 —

Consumer real estate loans

Home equity lines
1,604 1,772 — 1,372 1,477 —

Single family owner occupied
16,778 19,361 — 15,588 17,835 —

Owner occupied construction
216 216 — 648 648 —

Consumer and other loans

Consumer loans
818 833 — 290 294 —

Total impaired loans with no allowance
37,819 43,847 — 28,685 32,884 —

Impaired loans with a related allowance

Commercial loans

Non-farm, non-residential
1,068 1,121 319 1,241 1,227 292

Consumer real estate loans

Single family owner occupied
338 338 108 1,246 1,246 353

Total impaired loans with an allowance
1,406 1,459 427 2,487 2,473 645

Total impaired loans(1)
$ 39,225 $ 45,306 $ 427 $ 31,172 $ 35,357 $ 645

(1)

Total impaired loans include loans totaling $31.18 million as of December 31, 2020, and $24.64 million as of December 31, 2019, that do not meet the Company's evaluation threshold for individual impairment and are therefore collectively evaluated for impairment. During the first quarter of 2018, the Company changed the threshold for quarterly reviews of individual loans that are deemed to be impaired from $250 thousand to $500 thousand or greater.

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,

2020

2019

2018

(Amounts in thousands)

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Impaired loans with no related allowance:

Commercial loans

Construction, development, and other land
$ 25 $ 935 $ 22 $ 704 $ 26 $ 921

Commercial and industrial
155 2,749 34 363 19 383

Multi-family residential
19 808 24 1,356 47 910

Single family non-owner occupied
189 4,890 123 2,979 123 2,652

Non-farm, non-residential
295 7,450 123 4,683 133 4,828

Agricultural
9 241 9 121 — 164

Farmland
63 1,569 55 1,469 64 1,172

Consumer real estate loans

Home equity lines
51 1,594 46 1,439 44 1,637

Single family owner occupied
578 17,044 599 16,058 503 15,423

Owner occupied construction
10 407 29 308 8 244

Consumer and other loans

Consumer loans
42 543 13 213 9 161

Total impaired loans with no related allowance
1,436 38,230 1,077 29,693 976 28,495

Impaired loans with a related allowance:

Commercial loans

Multi-family residential
— 707 — — 2 270

Single family non-owner occupied
— — — — 7 110

Non-farm, non-residential
17 1,524 48 766 2 809

Farmland
— — — — — 307

Consumer real estate loans

Home equity lines
— — — — 3 68

Single family owner occupied
29 1,196 46 1,947 158 5,296

Total impaired loans with a related allowance
46 3,427 94 2,713 172 6,860

Total impaired loans
$ 1,482 $ 41,657 $ 1,171 $ 32,406 $ 1,148 $ 35,355

There were no PCI loan pools that became impaired subsequent to the acquisition of the loans as of December 31, 2020 or 2019.

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, 2020

December 31, 2019

(Amounts in thousands)

Non-covered

Covered

Total

Non-covered

Covered

Total

Commercial loans

Construction, development, and other land
$ 244 $ — $ 244 $ 211 $ — $ 211

Commercial and industrial
895 — 895 530 — 530

Multi-family residential
946 — 946 1,144 — 1,144

Single family non-owner occupied
2,990 — 2,990 1,286 — 1,286

Non-farm, non-residential
6,343 — 6,343 3,400 — 3,400

Agricultural
217 — 217 158 — 158

Farmland
489 — 489 713 — 713

Consumer real estate loans

Home equity lines
841 281 1,122 753 220 973

Single family owner occupied
7,960 16 7,976 7,259 24 7,283

Owner occupied construction
— — — 428 — 428

Consumer and other loans

Consumer loans
781 — 781 231 — 231

Total nonaccrual loans
$ 21,706 $ 297 $ 22,003 $ 16,113 $ 244 $ 16,357

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 $295 thousand as of December 31, 2020, and $144 thousand as of December 31, 2019.

December 31, 2020

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
$ 1,039 $ — $ 235 $ 1,274 $ 43,375 $ 44,649

Commercial and industrial
669 230 700 1,599 171,425 173,024

Multi-family residential
103 — 946 1,049 114,112 115,161

Single family non-owner occupied
925 488 2,144 3,557 184,041 187,598

Non-farm, non-residential
601 296 3,368 4,265 730,528 734,793

Agricultural
70 189 88 347 9,402 9,749

Farmland
43 — 457 500 19,261 19,761

Consumer real estate loans

Home equity lines
574 380 171 1,125 88,307 89,432

Single family owner occupied
5,283 2,265 3,891 11,439 647,239 658,678

Owner occupied construction
82 — — 82 17,638 17,720

Consumer and other loans

Consumer loans
2,637 746 651 4,034 116,339 120,373

Other
— — — — 6,014 6,014

Total non-covered loans
12,026 4,594 12,651 29,271 2,147,681 2,176,952

Covered loans

Commercial loans

Construction, development, and other land
— — — — 25 25

Single family non-owner occupied
— — — — 185 185

Consumer real estate loans

Home equity lines
75 — 254 329 6,765 7,094

Single family owner occupied
34 — — 34 2,342 2,376

Total covered loans
109 — 254 363 9,317 9,680

Total loans
$ 12,135 $ 4,594 $ 12,905 $ 29,634 $ 2,156,998 $ 2,186,632

December 31, 2019

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
$ 63 $ 65 $ 211 $ 339 $ 48,320 $ 48,659

Commercial and industrial
1,913 238 507 2,658 140,304 142,962

Multi-family residential
375 — 1,144 1,519 120,321 121,840

Single family non-owner occupied
754 267 661 1,682 161,499 163,181

Non-farm, non-residential
917 1,949 3,027 5,893 721,368 727,261

Agricultural
86 164 — 250 11,506 11,756

Farmland
856 349 664 1,869 21,286 23,155

Consumer real estate loans

Home equity lines
1,436 165 503 2,104 107,974 110,078

Single family owner occupied
7,728 2,390 3,766 13,884 606,813 620,697

Owner occupied construction
207 — 428 635 16,606 17,241

Consumer and other loans

Consumer loans
1,735 439 202 2,376 107,651 110,027

Other
22 — — 22 4,720 4,742

Total non-covered loans
16,092 6,026 11,113 33,231 2,068,368 2,101,599

Covered loans

Commercial loans

Construction, development, and other land
— — — — 28 28

Single family non-owner occupied
— — — — 199 199

Non-farm, non-residential
— — — — 3 3

Consumer real estate loans

Home equity lines
144 28 — 172 9,681 9,853

Single family owner occupied
— 50 — 50 2,728 2,778

Total covered loans
144 78 — 222 12,639 12,861

Total loans
$ 16,236 $ 6,104 $ 11,113 $ 33,453 $ 2,081,007 $ 2,114,460

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 $500 thousand are evaluated for a specific reserve based on either the collateral or net present value method, whichever is most applicable. Restructured loans under $500 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, 2020 or 2019.

The CARES Act included a provision allowing banks to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt this provision of the CARES Act.

Through December 31, 2020, the Company had modified a total of 3,625 loans with principal balances totaling $458.17 million related to COVID-19 relief. Those modifications were generally short-term payment deferrals and are not considered TDRs based on the CARES Act. The Company’s policy is to downgrade commercial loans modified for COVID-19 to Special Mention due to a higher-than-usual level of risk, which caused the significant increase in loans in that rating. Subsequent upgrade or downgrade will be on a case by case basis. The Company will consider upgrading these loans back to pass once the modification period has ended and timely contractual payments resume. Further downgrade would be based on a number of factors, including but not limited to additional modifications, payment performance and current underwriting. As of December 31, 2020, current commercial and consumer COVID-19 loan deferrals stood at $26.54 million and $5.72 million, respectively, down significantly from our peak of $436.11 million at June 30, 2020.

The following table presents loans modified as TDRs, by loan class and accrual status, as of the dates indicated:

December 31,

2020

2019

(Amounts in thousands)

Nonaccrual(1)

Accruing

Total

Nonaccrual(1)

Accruing

Total

Commercial loans

Commercial and industrial $ — $ 1,326 $ 1,326 $ — $ — $ —

Single family non-owner occupied
1,585 1,265 2,850 552 595 1,147

Non-farm, non-residential
— 2,407 2,407 — 307 307

Consumer real estate loans

Home equity lines
— 77 77 — 115 115

Single family owner occupied
229 4,927 5,156 1,790 5,305 7,095

Owner occupied construction
— 216 216 — 221 221

Consumer and other loans

Consumer loans
— 30 30 — 32 32

Total TDRs
$ 1,814 $ 10,248 $ 12,062 $ 2,342 $ 6,575 $ 8,917

Allowance for loan losses related to TDRs
$ — $ 353

(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,

2020

2019

2018

(Amounts in thousands)

Interest income recognized
$ 473 $ 277 $ 264

The following table presents loans modified as TDRs, by type of concession made and loan class, that were restructured during the periods indicated.

Year Ended December 31,

2020

2019

(Amounts in thousands)

Total Contracts

Pre-modification Recorded Investment

Post modification Recorded Investment(1)

Total Contracts

Pre-modification Recorded Investment

Post modification Recorded Investment(1)

Below market interest rate

Single family owner occupied
1 $ 50 $ 50 — $ — $ —

Below market interest rate and extended payment term

Single family owner occupied
— — — 6 887 871

Principal deferral

Construction, development, and other land development 3 1,708 1,708 — — —

Non-farm, non-residential 3 2,115 2,115 — — —

Home equity — — — 1 5 2

Single family owner occupied
5 1,085 1,054 3 331 279

Total principal deferral
11 4,908 4,877 4 336 281

Total
12 $ 4,958 $ 4,927 10 $ 1,223 $ 1,152

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

Year Ended December 31,

2020

2019

Total

Recorded

Total

Recorded

Contracts

Investment

Contracts

Investment

(Amounts in thousands)

Single family owner occupied
1 $ 53 — $ —

Total
1 $ 53 — $ —

The following table provides information about OREO, which consists of properties acquired through foreclosure, as of the dates indicated:

December 31, 2020

December 31, 2019

(Amounts in thousands)

Non-covered OREO
$ 2,083 $ 3,969

Total OREO
$ 2,083 $ 3,969

Non-covered OREO secured by residential real estate
$ 769 $ 2,232

Residential real estate loans in the foreclosure process(1)
4,141 1,539

(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