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3. Loans
 12 Months Ended
Dec. 31, 2012
Receivables [Abstract]  
Loans

(3) Loans

 

Major classifications of loans at December 31, 2012 and 2011 are summarized as follows:

 

(Dollars in thousands)            
    December 31, 2012     December 31, 2011  
Real estate loans            
     Construction and land development   $ 73,176       93,812  
     Single-family residential     195,003       212,993  
     Single-family residential -                
Banco de la Gente stated income     52,019       54,058  
     Commercial     200,633       214,415  
     Multifamily and farmland     8,951       4,793  
Total real estate loans     529,782       580,071  
                 
Commercial loans (not secured by real estate)     64,295       60,646  
Farm loans (not secured by real estate)     11       -  
Consumer loans (not secured by real estate)     10,148       10,490  
All other loans (not secured by real estate)     15,738       19,290  
                 
     Total loans     619,974       670,497  
                 
Less allowance for loan losses     14,423       16,604  
                 
     Total net loans   $ 605,551       653,893  

 

The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Union and Wake counties of North Carolina.  Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market.  Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:

 

·   Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing.  During the construction phase, a number of factors can result in delays or cost overruns.  If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of December 31, 2012, construction and land development loans comprised approximately 12% of the Bank’s total loan portfolio.

 

·   Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans.  As of December 31, 2012, single-family residential loans comprised approximately 40% of the Bank’s total loan portfolio, including Banco de la Gente single-family residential stated income loans amounting to approximately 8% of the Bank’s total loan portfolio.

 

·   Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.  These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity.  A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.  As of December 31, 2012, commercial real estate loans comprised approximately 32% of the Bank’s total loan portfolio.

 

·   Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business.   In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business.  As of December 31, 2012, commercial loans comprised approximately 10% of the Bank’s total loan portfolio.

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The following tables present an age analysis of past due loans, by loan type, as of December 31, 2012 and 2011:

 

December 31, 2012                                    
(Dollars in thousands)                                    
    Loans 30-89 Days Past Due     Loans 90 or More Days Past Due     Total Past Due Loans     Total Current Loans     Total Loans     Accruing Loans 90 or More Days Past Due  
Real estate loans                                    
     Construction and land development   $ 1,280       6,858       8,138       65,038       73,176       -  
     Single-family residential     4,316       1,548       5,864       189,139       195,003       -  
     Single-family residential -                                                
Banco de la Gente stated income     11,077       3,659       14,736       37,283       52,019       2,378  
     Commercial     1,720       1,170       2,890       197,743       200,633       -  
     Multifamily and farmland     7       -       7       8,944       8,951       -  
          Total real estate loans     18,400       13,235       31,635       498,147       529,782       2,378  
                                                 
Commercial loans (not secured by real estate)     888       66       954       63,341       64,295       23  
Farm loans (not secured by real estate)     -       -       -       11       11       -  
Consumer loans (not secured by real estate)     250       10       260       9,888       10,148       2  
All other loans (not secured by real estate)     -       -       -       15,738       15,738       -  
     Total loans   $ 19,538       13,311       32,849       587,125       619,974       2,403  

 

December 31, 2011                                    
(Dollars in thousands)                                    
    Loans 30-89 Days Past Due     Loans 90 or More Days Past Due     Total Past Due Loans     Total Current Loans     Total Loans     Accruing Loans 90 or More Days Past Due  
Real estate loans                                    
     Construction and land development   $ 10,033       3,338       13,371       80,441       93,812       -  
     Single-family residential     4,612       1,434       6,046       206,947       212,993       107  
     Single-family residential -                                                
Banco de la Gente stated income     11,924       4,755       16,679       37,379       54,058       2,602  
     Commercial     1,002       958       1,960       212,455       214,415       -  
     Multifamily and farmland     13       -       13       4,780       4,793       -  
          Total real estate loans     27,584       10,485       38,069       542,002       580,071       2,709  
                                                 
Commercial loans (not secured by real estate)     576       9       585       60,061       60,646       -  
Consumer loans (not secured by real estate)     116       36       152       10,338       10,490       -  
All other loans (not secured by real estate)     -       -       -       19,290       19,290       -  
     Total loans   $ 28,276       10,530       38,806       631,691       670,497       2,709  

 

The following tables present the Bank’s non-accrual loans as of December 31, 2012 and 2011:

 

(Dollars in thousands)            
    December 31, 2012     December 31, 2011  
Real estate loans            
     Construction and land development   $ 9,253       13,257  
     Single-family residential     2,491       2,380  
     Single-family residential -                
Banco de la Gente stated income     2,232       3,142  
     Commercial     3,263       2,451  
          Total real estate loans     17,239       21,230  
                 
Commercial loans (not secured by real estate)     344       403  
Consumer loans (not secured by real estate)     47       152  
     Total   $ 17,630       21,785  

 

At each reporting period, the Bank determines which loans are impaired.  Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis.  An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral.  The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank.  REAS is staffed by certified appraisers that also perform appraisals for other companies.  Factors including the assumptions and techniques utilized by the appraiser are considered by management.  If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses.  An allowance for each impaired loan that is non-collateral dependent is calculated based on the present value of projected cash flows.  If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses.  Impaired loans under $250,000 are not individually evaluated for impairment, with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment.  Accruing impaired loans were $30.6 million at December 31, 2012 and 2011.  Interest income recognized on accruing impaired loans was $1.5 million and $1.7 million for the years ended December 31, 2012 and 2011, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

 

The following tables present the Bank’s impaired loans as of December 31, 2012 and 2011:

 

December 31, 2012                                    
(Dollars in thousands)                                    
    Unpaid Contractual Principal Balance     Recorded Investment With No Allowance     Recorded Investment With Allowance     Recorded Investment in Impaired Loans    

Related

Allowance

     Average Outstanding Impaired Loans  
Real estate loans                                    
     Construction and land development   $ 17,738       11,795       680       12,475       61       12,810  
     Single-family residential     9,099       766       7,799       8,565       177       7,590  
     Single-family residential -                                                
Banco de la Gente stated income     21,806       -       21,000       21,000       1,278       21,158  
     Commercial     5,830       4,569       467       5,036       6       5,433  
     Multifamily and farmland     193       -       193       193       1       200  
          Total impaired real estate loans     54,666       17,130       30,139       47,269       1,523       47,191  
                                                 
Commercial loans (not secured by real estate)     983       347       592       939       12       1,125  
Consumer loans (not secured by real estate)     68       -       66       66       1       41  
     Total impaired loans   $ 55,717       17,477       30,797       48,274       1,536       48,357  

 

December 31, 2011                                    
(Dollars in thousands)                                    
    Unpaid Contractual Principal Balance     Recorded Investment With No Allowance     Recorded Investment With Allowance     Recorded Investment in Impaired Loans    

Related

Allowance

     Average Outstanding Impaired Loans  
Real estate loans                                    
     Construction and land development   $ 28,721       14,484       6,098       20,582       3,264       17,848  
     Single-family residential     6,361       969       5,117       6,086       131       6,324  
     Single-family residential -                                                
Banco de la Gente stated income     20,021       -       19,602       19,602       1,296       18,778  
     Commercial     7,717       3,845       3,139       6,984       77       4,518  
     Multifamily and farmland     209       -       209       209       1       214  
          Total impaired real estate loans     63,029       19,298       34,165       53,463       4,769       47,682  
                                                 
Commercial loans (not secured by real estate)     1,111       -       1,083       1,083       26       1,485  
Consumer loans (not secured by real estate)     157       -       152       152       2       140  
     Total impaired loans   $ 64,297       19,298       35,400       54,698       4,797       49,307  

 

The Bank’s December 31, 2012 and 2011 fair value measurements for impaired loans and other real estate on a non-recurring basis are presented below.  The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral, and other matters.  As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

 

(Dollars in thousands)                          
    Fair Value Measurements December 31, 2012     Level 1 Valuation     Level 2 Valuation     Level 3 Valuation     Total Gains/(Losses) for the Year Ended December 31, 2012  
Impaired loans   $ 46,738       -       -       46,738       (7,986 )
Other real estate   $ 6,254       -       -       6,254       (1,136 )

 

(Dollars in thousands)                          
    Fair Value Measurements December 31, 2011     Level 1 Valuation     Level 2 Valuation     Level 3 Valuation     Total Gains/(Losses) for the Year Ended December 31, 2011  
Impaired loans   $ 49,901       -       -       49,901       (11,864 )
Other real estate   $ 7,576       -       -       7,576       (1,322 )

 

Changes in the allowance for loan losses for the year ended December 31, 2012 were as follows:

 

Year ended December 31, 2012                                                        
(Dollars in thousands)                                                            
    Real Estate Loans                                
    Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Stated Income     Commercial     Multifamily and Farmland     Commercial     Farm     Consumer and All Other     Unallocated     Total  
Allowance for loan losses:                                                        
Beginning balance   $ 7,182       3,253       2,104       1,731       13       1,029       -       255       1,037       16,604  
Charge-offs     (4,728 )     (886 )     (668 )     (937 )     -       (555 )     -       (557 )     -       (8,331 )
Recoveries     528       72       -       374       -       104       -       148       -       1,226  
Provision     1,417       792       562       881       15       510       -       399       348       4,924  
Ending balance   $ 4,399       3,231       1,998       2,049       28       1,088       -       245       1,385       14,423  
                                                                                 
Ending balance: individually                                                                          
   evaluated for impairment   $ 24       84       1,254       -       -       -       -       -       -       1,362  
Ending balance: collectively                                                                          
   evaluated for impairment     4,375       3,147       744       2,049       28       1,088       -       245       1,385       13,061  
Ending balance   $ 4,399       3,231       1,998       2,049       28       1,088       -       245       1,385       14,423  
                                                                                 
Loans:                                                                                
Ending balance   $ 73,176       195,003       52,019       200,633       8,951       64,295       11       25,886       -       619,974  
                                                                                 
Ending balance: individually                                                                          
   evaluated for impairment   $ 11,961       3,885       20,024       4,569       -       346       -       -       -       40,785  
Ending balance: collectively                                                                          
   evaluated for impairment   $ 61,215       191,118       31,995       196,064       8,951       63,949       11       25,886       -       579,189  

 

Changes in the allowance for loan losses for the year ended December 31, 2011 were as follows:

 

Year ended December 31, 2011
(Dollars in thousands)
    Real Estate Loans                          
    Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Stated Income     Commercial     Multifamily and Farmland     Commercial     Consumer and All Other     Unallocated     Total  
Allowance for loan losses:                                                      
Beginning balance   $ 5,774       3,992       2,105       1,409       17       1,174       430       592       15,493  
Charge-offs     (7,164 )     (2,233 )     (692 )     (1,271 )     -       (314 )     (586 )     -       (12,260 )
Recoveries     241       184       17       24       -       121       152       -       739  
Provision     8,331       1,310       674       1,569       (4 )     48       259       445       12,632  
Ending balance   $ 7,182       3,253       2,104       1,731       13       1,029       255       1,037       16,604  
                                                                         
Ending balance: individually                                                                  
evaluated for impairment   $ 1,250       46       1,243       -       -       -       -       -       2,539  
Ending balance: collectively                                                                        
evaluated for impairment     5,932       3,207       861       1,731       13       1,029       255       1,037       14,065  
Ending balance   $ 7,182       3,253       2,104       1,731       13       1,029       255       1,037       16,604  
                                                                         
Loans:                                                                        
Ending balance   $ 93,812       212,993       54,058       214,415       4,793       60,646       29,780       -       670,497  
                                                                         
Ending balance: individually                                                                  
evaluated for impairment   $ 20,280       2,352       18,309       3,845       -       -       -       -       44,786  
Ending balance: collectively                                                                        
evaluated for impairment   $ 73,532       210,641       35,749       210,570       4,793       60,646       29,780       -       625,711  

 

 Changes in the allowance for loan losses for the year ended December 31, 2010 were as follows:

 

(Dollars in thousands)      
    2010  
       
Balance at beginning of year   $ 15,413  
Amounts charged off     (16,911 )
Recoveries on amounts previously charged off     553  
Provision for loan losses     16,438  
         
Balance at end of year   $ 15,493  

 

The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 9.  These risk grades are evaluated on an ongoing basis.  A description of the general characteristics of the nine risk grades is as follows:

 

·   Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists.  CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
·   Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability.  The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
·   Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
·   Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed.  These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
·   Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.
·   Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any).  There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
·   Risk Grade 7 – Low Substandard: These loans have the general characteristics of a Grade 6 Substandard loan, with heightened potential concerns.  The exact amount of loss is not yet known because neither the liquidation value of the collateral nor the borrower’s predicted repayment ability is known with confidence.
·   Risk Grade 8 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.  Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
·   Risk Grade 9 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future.  Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.

 

The following tables present the credit risk profile of each loan type based on internally assigned risk grade as of December 31, 2012 and 2011.

 

December 31, 2012                                                            
(Dollars in thousands)                                                            
    Real Estate Loans                                
    Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Stated Income     Commercial     Multifamily and Farmland     Commercial     Farm     Consumer     All Other     Total  
                                                             
1- Excellent Quality   $ 11       24,662       -       -       -       672       -       1,239       -       26,584  
2- High Quality     4,947       56,829       -       27,511       32       9,260       -       4,122       2,317       105,018  
3- Good Quality     24,952       62,018       24,724       114,001       4,975       40,814       11       4,186       13,416       289,097  
4- Management Attention     18,891       35,727       11,366       47,603       3,039       11,844       -       392       5       128,867  
5- Watch     9,580       9,504       3,597       6,911       712       976       -       134       -       31,414  
6- Substandard     14,795       6,263       12,332       4,607       193       729       -       70       -       38,989  
7- Low Substandard     -       -       -       -       -       -       -       -       -       -  
8- Doubtful     -       -       -       -       -       -       -       -       -       -  
9- Loss     -       -       -       -       -       -       -       5       -       5  
      Total   $ 73,176       195,003       52,019       200,633       8,951       64,295       11       10,148       15,738       619,974  

 

December 31, 2011                                                      
(Dollars in thousands)                                                      
    Real Estate Loans                          
    Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Stated Income     Commercial     Multifamily and Farmland     Commercial     Consumer     All Other     Total  
                                                       
1- Excellent Quality   $ 197       25,474       -       -       -       715       1,344       -       27,730  
2- High Quality     5,183       64,817       -       25,506       50       8,801       4,070       2,774       111,201  
3- Good Quality     27,675       74,824       25,564       136,137       3,448       36,585       4,259       16,509       325,001  
4- Management Attention     28,138       35,233       15,020       40,312       358       12,882       429       7       132,379  
5- Watch     15,923       6,141       5,626       2,795       728       622       89       -       31,924  
6- Substandard     16,696       6,504       7,848       9,665       209       1,041       154       -       42,117  
7- Low Substandard     -       -       -       -       -       -       -       -       -  
8- Doubtful     -       -       -       -       -       -       -       -       -  
9- Loss     -       -       -       -       -       -       145       -       145  
      Total   $ 93,812       212,993       54,058       214,415       4,793       60,646       10,490       19,290       670,497  

 

At December 31, 2012, TDR loans amounted to $23.9 million, including $2.0 million in performing TDR loans. Effective March 31, 2012, performing TDR balances reflect current year TDR loans only, in accordance with GAAP.  Previously reported TDR amounts reflect cumulative TDR loans from prior periods in addition to current year TDR loans.  At December 31, 2011, TDR loans were $44.1 million, including $15.1 million in performing TDR loans.   The terms of these loans have been renegotiated to provide a reduction in principal or interest as a result of the deteriorating financial position of the borrower.

 

The following table presents an analysis of TDR loans by loan type as of December 31, 2012.

 

December 31, 2012                  
(Dollars in thousands)                  
   

Number of

Contracts

     Pre-Modification Outstanding Recorded Investment     Post-Modification Outstanding Recorded Investment  
Real estate loans                  
     Construction and land development     11     $ 10,465       6,633  
     Single-family residential     33       3,014       4,084  
     Single-family residential -                        
        Banco de la Gente stated income     122       13,459       12,170  
     Commercial     4       1,457       682  
          Total real estate TDR loans     170       28,395       23,569  
                         
Commercial loans (not secured by real estate)     9       511       368  
Consumer loans (not secured by real estate)     1       2       -  
     Total TDR loans     180     $ 28,908       23,937  

 

The following table presents an analysis of 2012 loan modifications included in the December 31, 2012 TDR table above.

 

December 31, 2012                  
(Dollars in thousands)                  
    Number of Contracts     Pre-Modification Outstanding Recorded Investment     Post-Modification Outstanding Recorded Investment  
Real estate loans                  
     Single-family residential     5     $ 674       673  
     Single-family residential -                        
        Banco de la Gente stated income     20       2,046       1,992  
          Total real estate TDR loans     25       2,720       2,665  
                         
Commercial loans (not secured by real estate)     1       14       13  
     Total TDR loans     26     $ 2,734       2,678  

 

The following table presents an analysis of TDR loans by loan type as of December 31, 2011.

 

December 31, 2011                  
(Dollars in thousands)                  
    Number of Contracts     Pre-Modification Outstanding Recorded Investment     Post-Modification Outstanding Recorded Investment  
Real estate loans                  
     Construction and land development     29     $ 19,762       12,840  
     Single-family residential     48       4,684       5,244  
     Single-family residential -                        
Banco de la Gente stated income     193       20,857       19,602  
     Commercial     15       7,200       5,013  
     Multifamily and farmland     1       322       209  
          Total real estate TDR loans     286       52,825       42,908  
                         
Commercial loans (not secured by real estate)     21       1,711       1,083  
Consumer loans (not secured by real estate)     8       124       142  
     Total TDR loans     315     $ 54,660       44,133