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3. Loans

12 Months Ended

Dec. 31, 2015

Receivables [Abstract]

Loans

Major classifications of loans at December 31, 2015 and 2014 are summarized as follows:

(Dollars in thousands)
		December 31, 2015				December 31, 2014
Real estate loans:
Construction and land development		$	65,791				57,617
Single-family residential			220,690				206,417
Single-family residential -
Banco de la Gente stated income			43,733				47,015
Commercial			228,526				228,558
Multifamily and farmland			18,080				12,400
Total real estate loans			576,820				552,007

Loans not secured by real estate:
Commercial loans			91,010				76,262
Farm loans			3				7
Consumer loans			10,027				10,060
All other loans			11,231				13,555

Total loans			689,091				651,891

Less allowance for loan losses			9,589				11,082

Total net loans		$	679,502				640,809

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, Wake, Durham and Forsyth 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 the 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, 2015, construction and land development loans comprised approximately 10% 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, 2015, single-family residential loans comprised approximately 38% of the Bank's total loan portfolio, including Banco de la Gente single-family residential stated income loans which were approximately 6% 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, 2015, commercial real estate loans comprised approximately 33% 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, 2015, commercial loans comprised approximately 13% 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, 2015 and 2014:

December 31, 2015
(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		$	330				17				347				65,444				65,791				-
Single-family residential			2,822				1,385				4,207				216,483				220,690				-
Single-family residential -
Banco de la Gente stated income			7,021				114				7,135				36,598				43,733				-
Commercial			2,619				157				2,776				225,750				228,526				-
Multifamily and farmland			-				-				-				18,080				18,080				-
Total real estate loans			12,792				1,673				14,465				562,355				576,820				-

Loans not secured by real estate:
Commercial loans			185				40				225				90,785				91,010				17
Farm loans			-				-				-				3				3				-
Consumer loans			136				8				144				9,883				10,027				-
All other loans			-				-				-				11,231				11,231				-
Total loans		$	13,113				1,721				14,834				674,257				689,091				17

December 31, 2014
(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		$	294				3,540				3,834				53,783				57,617				-
Single-family residential			5,988				268				6,256				200,161				206,417				-
Single-family residential -
Banco de la Gente stated income			8,998				610				9,608				37,407				47,015				-
Commercial			3,205				366				3,571				224,987				228,558				-
Multifamily and farmland			85				-				85				12,315				12,400				-
Total real estate loans			18,570				4,784				23,354				528,653				552,007				-

Loans not secured by real estate:
Commercial loans			241				49				290				75,972				76,262				-
Farm loans			-				-				-				7				7				-
Consumer loans			184				-				184				9,876				10,060				-
All other loans			-				-				-				13,555				13,555				-
Total loans		$	18,995				4,833				23,828				628,063				651,891				-

The following table presents the Bank's non-accrual loans as of December 31, 2015 and 2014:

(Dollars in thousands)
		December 31, 2015				December 31, 2014
Real estate loans:
Construction and land development		$	146				3,854
Single-family residential			4,023				2,370
Single-family residential -
Banco de la Gente stated income			1,106				1,545
Commercial			2,992				2,598
Multifamily and farmland			-				110
Total real estate loans			8,267				10,477

Loans not secured by real estate:
Commercial loans			113				176
Consumer loans			52				75
Total		$	8,432				10,728

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 not 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. Impaired loans collectively evaluated for impairment totaled $8.4 million and $8.1 million at December 31, 2015 and 2014, respectively. Accruing impaired loans were $25.0 million and $25.6 million at December 31, 2015 and December 31, 2014, respectively. Interest income recognized on accruing impaired loans was $1.3 million for the years ended December 31, 2015 and 2014. 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, 2015 and 2014:

December 31, 2015
(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		$	643				216				226				442				12				705
Single-family residential			8,828				1,489				6,805				8,294				189				10,852
Single-family residential -
Banco de la Gente stated income			20,375				-				19,215				19,215				1,143				18,414
Commercial			4,556				-				4,893				4,893				179				5,497
Multifamily and farmland			96				-				83				83				-				93
Total impaired real estate loans			34,498				1,705				31,222				32,927				1,523				35,561

Loans not secured by real estate:
Commercial loans			180				-				161				161				3				132
Consumer loans			286				-				260				260				4				283
Total impaired loans		$	34,964				1,705				31,643				33,348				1,530				35,976

December 31, 2014
(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		$	5,481				3,639				555				4,194				31				5,248
Single-family residential			6,717				933				5,540				6,473				154				7,430
Single-family residential -
Banco de la Gente stated income			21,243				-				20,649				20,649				1,191				19,964
Commercial			4,752				1,485				2,866				4,351				272				4,399
Multifamily and farmland			111				-				110				110				1				154
Total impaired real estate loans			38,304				6,057				29,720				35,777				1,649				37,195

Loans not secured by real estate:
Commercial loans			218				-				201				201				4				641
Consumer loans			318				-				313				313				5				309
Total impaired loans		$	38,840				6,057				30,234				36,291				1,658				38,145

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2015 and 2014 are presented below. The Company's valuation methodology is discussed in Note 15.

(Dollars in thousands)
		Fair Value Measurements December 31, 2015				Level 1 Valuation				Level 2 Valuation				Level 3 Valuation
Mortgage loans held for sale		$	4,149				-				-				4,149
Impaired loans		$	31,818				-				-				31,818
Other real estate		$	739				-				-				739

(Dollars in thousands)
		Fair Value Measurements December 31, 2014				Level 1 Valuation				Level 2 Valuation				Level 3 Valuation
Mortgage loans held for sale		$	1,375				-				-				1,375
Impaired loans		$	34,633				-				-				34,633
Other real estate		$	2,016				-				-				2,016

(Dollars in thousands)
		Fair Value December 31, 2015				Fair Value December 31, 2014			Valuation Technique		Significant Unobservable Inputs				General Range of Significant Unobservable Input Values
Mortgage loans held for sale		$	4,149				1,375		Rate lock commitment			N/A				N/A
Impaired loans		$	31,818				34,633		Appraised value and discounted cash flows		Discounts to reflect current market conditions and ultimate collectability					0 - 25%
Other real estate		$	739				2,016		Appraised value		Discounts to reflect current market conditions and estimated costs to sell					0 - 25%

Changes in the allowance for loan losses for the year ended December 31, 2015 were as follows:

(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		$	2,785				2,566				1,610				1,902				7				1,098				-				233				881				11,082
Charge-offs			(198	)			(618	)			(117	)			(329	)			-				(37	)			-				(545	)			-				(1,844	)
Recoveries			45				34				22				21				-				101				-				145				-				368
Provision			(447	)			552				(55	)			323				(7	)			(320	)			-				339				(402	)			(17	)
Ending balance		$	2,185				2,534				1,460				1,917				-				842				-				172				479				9,589


Ending balance: individually
evaluated for impairment		$	-				96				1,115				171				-				-				-				-				-				1,382
Ending balance: collectively
evaluated for impairment			2,185				2,438				345				1,746				-				842				-				172				479				8,207
Ending balance		$	2,185				2,534				1,460				1,917				-				842				-				172				479				9,589

Loans:
Ending balance		$	65,791				220,690				43,733				228,526				18,080				91,010				3				21,258				-				689,091

Ending balance: individually
evaluated for impairment		$	216				2,636				17,850				4,212				-				-				-				-				-				24,914
Ending balance: collectively
evaluated for impairment		$	65,575				218,054				25,883				224,314				18,080				91,010				3				21,258				-				664,177

Changes in the allowance for loan losses for the year ended December 31, 2014 were as follows:

(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		$	3,218				3,123				1,863				2,219				37				1,069				-				245				1,727				13,501
Charge-offs			(884	)			(309	)			(190	)			(290	)			-				(430	)			-				(534	)			-				(2,637	)
Recoveries			428				72				16				171				-				54				-				176				-				917
Provision			23				(320	)			(79	)			(198	)			(30	)			405				-				346				(846	)			(699	)
Ending balance		$	2,785				2,566				1,610				1,902				7				1,098				-				233				881				11,082


Ending balance: individually
evaluated for impairment		$	-				82				1,155				260				-				-				-				-				-				1,497
Ending balance: collectively
evaluated for impairment			2,785				2,484				455				1,642				7				1,098				-				233				881				9,585
Ending balance		$	2,785				2,566				1,610				1,902				7				1,098				-				233				881				11,082

Loans:
Ending balance		$	57,617				206,417				47,015				228,558				12,400				76,262				7				23,615				-				651,891

Ending balance: individually
evaluated for impairment		$	3,639				2,298				18,884				3,345				-				-				-				-				-				28,166
Ending balance: collectively
evaluated for impairment		$	53,978				204,119				28,131				225,213				12,400				76,262				7				23,615				-				623,725

Changes in the allowance for loan losses for the year ended December 31, 2013 were as follows:

(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			(777	)			(1,724	)			(272	)			(445	)			-				(502	)			-				(652	)			-				(4,372	)
Recoveries			377				111				141				50				-				44				-				143				-				866
Provision			(781	)			1,505				(4	)			565				9				439				-				509				342				2,584
Ending balance		$	3,218				3,123				1,863				2,219				37				1,069				-				245				1,727				13,501


Ending balance: individually
evaluated for impairment		$	-				39				1,268				171				-				-				-				-				-				1,478
Ending balance: collectively
evaluated for impairment			3,218				3,084				595				2,048				37				1,069				-				245				1,727				12,023
Ending balance		$	3,218				3,123				1,863				2,219				37				1,069				-				245				1,727				13,501

Loans:
Ending balance		$	63,742				195,975				49,463				209,287				11,801				68,047				19				22,626				-				620,960

Ending balance: individually
evaluated for impairment		$	6,293				3,127				19,958				3,767				-				256				-				265				-				33,666
Ending balance: collectively
evaluated for impairment		$	57,449				192,848				29,505				205,520				11,801				67,791				19				22,361				-				587,294

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 8. These risk grades are evaluated on an ongoing basis. 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 December 31, 2015 and 2014.

December 31, 2015
(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		$	-				15,189				-				-				-				700				-				1,091				-				16,980
2- High Quality			10,144				86,061				-				38,647				2,998				24,955				-				3,647				1,665				168,117
3- Good Quality			35,535				78,843				19,223				148,805				12,058				58,936				3				4,571				7,828				365,802
4- Management Attention			12,544				30,259				15,029				31,824				335				5,905				-				620				1,738				98,254
5- Watch			7,265				4,322				3,308				4,561				2,689				332				-				43				-				22,520
6- Substandard			303				6,016				6,173				4,689				-				182				-				55				-				17,418
7- Doubtful			-				-				-				-				-				-				-				-				-				-
8- Loss			-				-				-				-				-				-				-				-				-				-
Total		$	65,791				220,690				43,733				228,526				18,080				91,010				3				10,027				11,231				689,091

December 31, 2014
(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		$	-				15,099				-				-				-				924				-				1,232				-				17,255
2- High Quality			6,741				74,367				-				39,888				241				18,730				-				3,576				1,860				145,403
3- Good Quality			24,641				74,453				21,022				142,141				8,376				44,649				7				4,549				8,055				327,893
4- Management Attention			13,013				30,954				12,721				36,433				1,001				11,312				-				566				3,640				109,640
5- Watch			9,294				5,749				5,799				6,153				2,672				383				-				46				-				30,096
6- Substandard			3,928				5,795				7,473				3,943				110				264				-				87				-				21,600
7- Doubtful			-				-				-				-				-				-				-				-				-				-
8- Loss			-				-				-				-				-				-				-				4				-				4
Total		$	57,617				206,417				47,015				228,558				12,400				76,262				7				10,060				13,555				651,891

TDR loans modified in 2015, past due TDR loans and non-accrual TDR loans totaled $8.8 million and $15.0 million at December 31, 2015 and December 31, 2014, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were $354,000 and $1.4 million in performing loans classified as TDR loans at December 31, 2015 and December 31, 2014, respectively.

The following table presents an analysis of loan modifications during the year ended December 31, 2015:

Year ended December 31, 2015
(Dollars in thousands)
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
Construction and land development			1			$	216				216
Single-family residential			3				288				271
Total TDR loans			4			$	504				487

During the year ended December 31, 2015, four loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

The following table presents an analysis of loan modifications during the year ended December 31, 2014:

Year ended December 31, 2014
(Dollars in thousands)
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Real estate loans:
Construction and land development			1			$	291				266
Single-family residential			2				849				845
Single-family residential -
Banco de la Gente stated income			3				281				278
Total TDR loans			6			$	1,421				1,389

During the year ended December 31, 2014, six loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2015 and 2014. TDR loans are deemed to be in default if they become past due by 90 days or more.