XML 20 R10.htm IDEA: XBRL DOCUMENT

3. Loans

9 Months Ended

Sep. 30, 2016

Major classifications of loans at September 30, 2016 and December 31, 2015 are summarized as follows:

(Dollars in thousands)
	September 30, 2016		December 31, 2015
Real estate loans:
Construction and land development	$	59,456		65,791
Single-family residential		231,958		220,690
Single-family residential -
Banco de la Gente stated income		40,934		43,733
Commercial		240,150		228,526
Multifamily and farmland		18,727		18,080
Total real estate loans		591,225		576,820

Loans not secured by real estate:
Commercial loans		94,790		91,010
Farm loans		-		3
Consumer loans		10,036		10,027
All other loans		16,968		11,231

Total loans		713,019		689,091

Less allowance for loan losses		8,045		9,589

Total net loans	$	704,974		679,502

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 September 30, 2016, construction and land development loans comprised approximately 8% 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 September 30, 2016, single-family residential loans comprised approximately 38% of the Bank's total loan portfolio, and include Banco's 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 September 30, 2016, commercial real estate loans comprised approximately 34% 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 September 30, 2016, 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 September 30, 2016 and December 31, 2015:

September 30, 2016
(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	$	18		13		31		59,425		59,456		-
Single-family residential		1,344		310		1,654		230,304		231,958		-
Single-family residential -
Banco de la Gente stated income		1,588		257		1,845		39,089		40,934		-
Commercial		58		-		58		240,092		240,150		-
Multifamily and farmland		-		-		-		18,727		18,727		-
Total real estate loans		3,008		580		3,588		587,637		591,225		-

Loans not secured by real estate:
Commercial loans		85		-		85		94,705		94,790		-
Farm loans		-		-		-		-		-		-
Consumer loans		95		7		102		9,934		10,036		-
All other loans		-		-		-		16,968		16,968		-
Total loans	$	3,188		587		3,775		709,244		713,019		-

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

The following table presents non-accrual loans as of September 30, 2016 and December 31, 2015:

(Dollars in thousands)
	September 30, 2016		December 31, 2015
Real estate loans:
Construction and land development	$	31		146
Single-family residential		1,797		4,023
Single-family residential -
Banco de la Gente stated income		1,251		1,106
Commercial		1,571		2,992
Multifamily and farmland		-		-
Total real estate loans		4,650		8,267

Loans not secured by real estate:
Commercial loans		66		113
Consumer loans		41		52
Total	$	4,757		8,432

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. Accruing impaired loans were $22.9 million, $25.0 million and $25.5 million at September 30, 2016, December 31, 2015 and September 30, 2015, respectively. Interest income recognized on accruing impaired loans was $871,000, $968,000 and $1.3 million for the nine months ended September 30, 2016, the nine months ended September 30, 2015 and the year ended December 31, 2015, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present impaired loans as of September 30, 2016 and December 31, 2015:

September 30, 2016
(Dollars in thousands)
							Nine months ended		Three months ended
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance	Average Outstanding Impaired Loans	Interest Income Recognized	Average Outstanding Impaired Loans	Interest Income Recognized
Real estate loans:
Construction and land development	$	292	-	288	288	13	375	10	369	3
Single-family residential		5,731	878	4,473	5,351	46	8,921	122	6,556	40
Single-family residential -
Banco de la Gente stated income		18,603	-	18,094	18,094	1,188	17,673	657	17,395	207
Commercial		3,775	1,221	2,222	3,443	174	5,376	73	4,013	24
Multifamily and farmland		78	-	78	78	-	79	3	78	-
Total impaired real estate loans		28,479	2,099	25,155	27,254	1,421	32,424	865	28,411	274

Loans not secured by real estate:
Commercial loans		74	-	73	73	1	123	-	116	-
Consumer loans		226	-	219	219	4	235	6	225	2
Total impaired loans	$	28,779	2,099	25,447	27,546	1,426	32,782	871	28,752	276

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	YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	643	216	226	442	12	705	18
Single-family residential		8,828	1,489	6,805	8,294	189	10,852	224
Single-family residential -
Banco de la Gente stated income		20,375	-	19,215	19,215	1,143	18,414	921
Commercial		4,556	-	4,893	4,893	179	5,497	89
Multifamily and farmland		96	-	83	83	-	93	6
Total impaired real estate loans		34,498	1,705	31,222	32,927	1,523	35,561	1,258

Loans not secured by real estate:
Commercial loans		180	-	161	161	3	132	5
Consumer loans		286	-	260	260	4	283	11
Total impaired loans	$	34,964	1,705	31,643	33,348	1,530	35,976	1,274

Changes in the allowance for loan losses for the three and nine months ended September 30, 2016 and 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
Nine months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$	2,185		2,534		1,460		1,917		-	842		-	172		479	9,589
Charge-offs		-		(158	)	-		(106	)	-	(129	)	-	(361	)	-	(754	)
Recoveries		8		18		-		15		-	165		-	112		-	318
Provision		(808	)	(388	)	(60	)	(250	)	47	(118	)	-	291		178	(1,108	)
Ending balance	$	1,385		2,006		1,400		1,576		47	760		-	214		657	8,045

Three months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$	1,582		2,233		1,354		1,650		46	803		-	234		638	8,540
Charge-offs		-		(35	)	-		-		-	(89	)	-	(122	)	-	(246	)
Recoveries		2		6		-		5		-	60		-	38		-	111
Provision		(199	)	(198	)	46		(79	)	1	(14	)	-	64		19	(360	)
Ending balance	$	1,385		2,006		1,400		1,576		47	760		-	214		657	8,045

Allowance for loan losses at September 30, 2016:
Ending balance: individually
evaluated for impairment	$	-		-		1,164		167		-	-		-	-		-	1,331
Ending balance: collectively
evaluated for impairment		1,385		2,006		236		1,409		47	760		-	214		657	6,714
Ending balance	$	1,385		2,006		1,400		1,576		47	760		-	214		657	8,045

Loans at September 30, 2016:
Ending balance	$	59,456		231,958		40,934		240,150		18,727	94,790		-	27,004		-	713,019

Ending balance: individually
evaluated for impairment	$	-		1,019		16,890		3,586		-	-		-	-		-	21,495
Ending balance: collectively
evaluated for impairment	$	59,456		230,939		24,044		236,564		18,727	94,790		-	27,004		-	691,524

(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
Nine months ended September 30, 2015:
Allowance for loan losses:
Beginning balance	$	2,785		2,566		1,610		1,902		7		1,098		-	233		881		11,082
Charge-offs		(198	)	(447	)	(59	)	(62	)	-		(16	)	-	(394	)	-		(1,176	)
Recoveries		43		30		22		15		-		96		-	115		-		321
Provision		119		676		(113	)	75		(2	)	(297	)	-	258		(523	)	193
Ending balance	$	2,749		2,825		1,460		1,930		5		881		-	212		358		10,420

Three months ended September 30, 2015:
Allowance for loan losses:
Beginning balance	$	2,924		2,456		1,528		1,749		2		902		-	231		586		10,378
Charge-offs		(110	)	(48	)	-		-		-		(1	)	-	(156	)	-		(315	)
Recoveries		20		21		-		5		-		43		-	33		-		122
Provision		(85	)	396		(68	)	176		3		(63	)	-	104		(228	)	235
Ending balance	$	2,749		2,825		1,460		1,930		5		881		-	212		358		10,420

Allowance for loan losses September 30, 2015:
Ending balance: individually
evaluated for impairment	$	-		96		1,128		227		-		-		-	-		-		1,451
Ending balance: collectively
evaluated for impairment		2,749		2,729		332		1,703		5		881		-	212		358		8,969
Ending balance	$	2,749		2,825		1,460		1,930		5		881		-	212		358		10,420

Loans September 30, 2015:
Ending balance	$	61,748		218,365		44,433		234,003		14,003		88,931		3	23,314		-		684,800

Ending balance: individually
evaluated for impairment	$	241		2,944		18,193		3,525		-		-		-	-		-		24,903
Ending balance: collectively
evaluated for impairment	$	61,507		215,421		26,240		230,478		14,003		88,931		3	23,314		-		659,897

The provision for loan losses for the three months ended September 30, 2016 was a credit of $360,000, as compared to an expense of $235,000 for the three months ended September 30, 2015. The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the ASC 450-20 reserve as the elevated level of loan losses incurred in 2010 and 2011 are no longer included in the historical loss calculations.

The provision for loan losses for the nine months ended September 30, 2016 was a credit of $1.1 million, as compared to an expense of $193,000 for the nine months ended September 30, 2015. The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the ASC 450-20 reserve as the elevated level of loan losses incurred in 2010 and 2011 are no longer included in the historical loss calculations.

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. 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 as 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 September 30, 2016 and December 31, 2015:

September 30, 2016
(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	$	-	12,340	-	-	-	546	-	1,069	50	14,005
2- High Quality		8,012	103,847	-	39,701	2,915	28,510	-	3,399	2,580	188,964
3- Good Quality		32,958	81,307	17,136	166,724	12,150	59,125	-	4,838	12,565	386,803
4- Management Attention		11,406	25,846	15,811	27,507	1,187	6,248	-	632	1,773	90,410
5- Watch		6,858	3,854	2,807	3,321	2,475	250	-	43	-	19,608
6- Substandard		222	4,764	5,180	2,897	-	111	-	54	-	13,228
7- Doubtful		-	-	-	-	-	-	-	-	-	-
8- Loss		-	-	-	-	-	-	-	1	-	1
Total	$	59,456	231,958	40,934	240,150	18,727	94,790	-	10,036	16,968	713,019

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

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $4.3 million and $8.8 million at September 30, 2016 and December 31, 2015, 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 $41,000 and $354,000 in performing loans classified as TDR loans at September 30, 2016 and December 31, 2015, respectively.

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2016.

Three and nine months ended September 30, 2016
(Dollars in thousands)
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential	1	$	41	41
Total real estate TDR loans	1		41	41

Total TDR loans	1	$	41	41

During the three and nine months ended September 30, 2016, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan.

There were no TDR modifications during the three months ended September 30, 2015. The following table presents an analysis of TDR loan modifications during the nine months ended September 30, 2015.

Nine months ended September 30, 2015
(Dollars in thousands)
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential	1	$	146	142
Total real estate TDR loans	1		146	142

Total TDR loans	1	$	146	142

During the nine months ended September 30, 2015, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan.

There were no loans modified as TDR that defaulted during the three and nine months ended September 30, 2016 and 2015, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References + Details