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3. Loans
 3 Months Ended
Mar. 31, 2013
Receivables [Abstract]  
Loans

Major classifications of loans at March 31, 2013 and December 31, 2012 are summarized as follows:

 

(Dollars in thousands)      
  March 31, 2013   December 31, 2012
Real estate loans      
Construction and land development $ 72,389   73,176
Single-family residential   194,557   195,003
Single-family residential -        
Banco de la Gente stated income   51,410   52,019
Commercial   192,355   200,633
Multifamily and farmland   9,401   8,951
Total real estate loans   520,112   529,782
         
Loans not secured by real estate        
Commercial loans   65,058   64,295
Farm loans   27   11
Consumer loans   9,339   10,148
All other loans   15,429   15,738
Total loans   609,965   619,974
         
Less allowance for loan losses   14,412   14,423
         
Net loans $ 595,553   605,551

 

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 March 31, 2013, 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 March 31, 2013, 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 March 31, 2013, 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 March 31, 2013, commercial loans comprised approximately 11% 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 March 31, 2013 and December 31, 2012:

 

March 31, 2013            
(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 $ 1,095   7,189   8,284   64,105   72,389   -  
Single-family residential   4,901   2,050   6,951   187,606   194,557   48
Single-family residential -                        
Banco de la Gente stated income   13,425   609   14,034   37,376   51,410   -  
Commercial   3,659   143   3,802   188,553   192,355   -  
Multifamily and farmland   6   -     6   9,395   9,401   -  
Total real estate loans   23,086   9,991   33,077   487,035   520,112   48
                         
Loans not secured by real estate                        
Commercial loans   442   399   841   64,217   65,058   -  
Farm loans   -     -     -     27   27   -  
Consumer loans   153   15   168   9,171   9,339   2
All other loans   -     -     -     15,429   15,429   -  
Total loans $ 23,681   10,405   34,086   575,879   609,965   50

  

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
                         
Loans not secured by real estate                        
Commercial loans   888   66   954   63,341   64,295   23
Consumer loans   250   10   260   9,888   10,148   2
All other loans   -     -     -     15,738   15,738   -  
Total loans $ 19,538   13,311   32,849   587,125   619,974   2,403

 

The following table presents the Company’s non-accrual loans as of March 31, 2013 and December 31, 2012:

 

(Dollars in thousands)      
  March 31, 2013   December 31, 2012
Real estate loans      
Construction and land development $ 9,627   9,253
Single-family residential   4,123   2,491
Single-family residential -        
Banco de la Gente stated income   2,367   2,232
Commercial   2,822   3,263
Total real estate loans   18,939   17,239
         
Loans not secured by real estate        
Commercial loans   676   344
Consumer loans   52   47
Total $ 19,667   17,630

 

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 $26.8 million, $30.6 million and $32.2 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively.  Interest income recognized on accruing impaired loans was $293,000, $422,000 and $1.5 million for the three months ended March 31, 2013, the three months ended March 31, 2012 and the year ended December 31, 2012, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

 

The following tables present the Company’s impaired loans as of March 31, 2013 and December 31, 2012:

 

March 31, 2013            
(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 $ 14,514   9,238   953   10,191   149   10,006
Single-family residential   10,422   1,031   8,599   9,630   216   8,845
Single-family residential -                        
Banco de la Gente stated income   22,053   -     21,056   21,056   1,272   21,028
Commercial   4,895   3,971   463   4,434   7   4,840
Multifamily and farmland   189   -     189   189   1   191
Total impaired real estate loans   52,073   14,240   31,260   45,500   1,645   44,910
                         
Loans not secured by real estate                        
Commercial loans   975   -     922   922   259   931
Consumer loans   59   -     56   56   1   54
Total impaired loans $ 53,107   14,240   32,238   46,478   1,905   45,895

 

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
                         
Loans not secured by real estate                        
Commercial loans   983   347   592   939   12   1,125
Consumer loans   68   -     66   66   1   41
Total impaired loans $ 55,717   17,477   30,797   48,274   1,536   48,357

 

Changes in the allowance for loan losses for the three months ended March 31, 2013 and 2012 were as follows:

 

Three months ended March 31, 2013                  
(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 $ 4,399   3,231   1,998   2,049   28   1,088   -   245   1,385   14,423  
  Charge-offs   (497 ) (364 ) (152 ) -   -   (21 ) -   (147 ) -   (1,181 )
  Recoveries   1   18   -   48   -   11   -   35   -   113  
  Provision   882   297   130   (286 ) 2   131   -   99   (198 ) 1,057  
Ending balance $ 4,785   3,182   1,976   1,811   30   1,209   -   232   1,187   14,412  
                                             
Ending balance: individually                                          
  evaluated for impairment $ 102   110   1,245   -   -   247   -   -   -   1,704  
Ending balance: collectively                                          
  evaluated for impairment   4,683   3,072   731   1,811   30   962   -   232   1,187   12,708  
Ending balance $ 4,785   3,182   1,976   1,811   30   1,209   -   232   1,187   14,412  
                                             
Loans:                                            
Ending balance $ 72,389   194,557   51,410   192,355   9,401   65,058   27   24,768   -   609,965  
                                             
Ending balance: individually                                          
  evaluated for impairment $ 9,594   4,616   20,102   3,971   -   347   -   -   -   38,630  
Ending balance: collectively                                          
  evaluated for impairment $ 62,795   189,941   31,308   188,384   9,401   64,711   27   24,768   -   571,335  

 

Three months ended March 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  

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   (1,851 ) (105 ) (173 ) (71 ) -   (239 ) (157 ) -   (2,596 )
  Recoveries   118   2   -   374   -   5   56   -   555  
  Provision   1,431   (49 ) 249   (600 ) -   209   96   713   2,049  
Ending balance $ 6,880   3,101   2,180   1,434   13   1,004   250   1,750   16,612  
                                         
Ending balance: individually                                      
evaluated for impairment $ 967   46   1,310   -   -   -   -   -   2,323  
Ending balance: collectively                                      
 evaluated for impairment   5,913   3,055   870   1,434   13   1,004   250   1,750   14,289  
Ending balance $ 6,880   3,101   2,180   1,434   13   1,004   250   1,750   16,612  
                                         
Loans:                                        
Ending balance $ 90,838   206,360   53,677   212,124   4,453   62,020   28,871   -   658,343  
                                         
Ending balance: individually                                      
evaluated for impairment $ 21,045   3,556   20,407   3,357   -   408   28   -   48,801  
Ending balance: collectively                                      
 evaluated for impairment $ 69,793   202,804   33,270   208,767   4,453   61,612   28,843   -   609,542  

 

The Company 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 8.  These risk grades are evaluated on an ongoing basis.  The Low Substandard risk grade was removed from the Company’s internal risk grading matrix during the quarter ended March 31, 2013.  No loans were classified Low Substandard at December 31, 2012.  A description of the general characteristics of the eight 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 – 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 8 – 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 grades as of March 31, 2013 and December 31, 2012.

 

March 31, 2013                        
(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 $ 10   20,856   -   -   -   381   -   1,205   -   22,452
2- High Quality   5,652   57,771   -   27,153   104   9,022   -   3,667   2,264   105,633
3- Good Quality   25,757   66,700   24,176   109,732   5,476   41,850   27   3,923   13,161   290,802
4- Management Attention   17,391   32,262   10,551   42,994   1,058   11,730   -   421   4   116,411
5- Watch   9,453   9,743   3,586   6,221   2,574   1,363   -   57   -   32,997
6- Substandard   14,126   7,225   13,097   6,255   189   712   -   66   -   41,670
7- Doubtful   -   -   -   -   -   -   -   -   -   -
8- Loss   -   -   -   -   -   -   -   -   -   -
      Total $ 72,389   194,557   51,410   192,355   9,401   65,058   27   9,339   15,429   609,965

 

 

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

 

At March 31, 2013, TDR loans amounted to $21.7 million, including $253,000 in performing TDR loans.  Performing TDR balances reflect current year TDR loans only, in accordance with GAAP.  At December 31, 2012, TDR loans were $23.9 million, including $2.0 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 March 31, 2013.

 

March 31, 2013          
(Dollars in thousands)          
  Number of Contracts  

Pre-Modification Outstanding

Recorded

Investment

  

Post-Modification Outstanding

Recorded

Investment

Real estate loans          
Construction and land development 14   $ 10,601   6,952
Single-family residential 34     2,177   2,599
Single-family residential -            
Banco de la Gente stated income 109     12,170   10,649
Commercial 6     1,567   827
Total real estate TDR loans 163     26,515   21,027
             
Loans not secured by real estate            
Commercial loans 15     1,257   669
Consumer loans 1     2   -  
Total TDR loans 179   $ 27,774   21,696

 

The following table presents an analysis of first quarter 2013 loan modifications included in the March 31, 2013 TDR table above.

 

March 31, 2013            
(Dollars in thousands)            
  Number of Contracts    

Pre-Modification Outstanding

Recorded

Investment

  

Post-Modification Outstanding

Recorded

Investment

Real estate loans            
     Construction and land development  1    $  117    117
     Single-family residential -            
    Banco de la Gente stated income 3    $ 332   331
          Total real estate TDR loans 4     449   448
             
     Total TDR loans 4    $ 449   448

 

The following table presents an analysis of first quarter 2012 loan modifications.

 

March 31, 2012          
(Dollars in thousands)          
  Number of Contracts  

Pre-Modification Outstanding

Recorded

Investment

  

Post-Modification Outstanding

Recorded

Investment

Real estate loans          
     Single-family residential -            
    Banco de la Gente stated income 7   $ 732   730
          Total real estate TDR loans 7     732   730
             
     Total TDR loans 7   $ 732   730

 

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
    Multifamily and farmland -       -     -  
Total real estate TDR loans 170     28,395   23,569
             
Loans not secured by real estate            
Commercial loans 9     511   368
Consumer loans 1     2   -  
Total TDR loans 180   $ 28,908   23,937