XML 20 R10.htm IDEA: XBRL DOCUMENT

3. Loans

9 Months Ended

Sep. 30, 2017

Major classifications of loans at September 30, 2017 and December 31, 2016 are summarized as follows:

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	75,483		61,749
Single-family residential		247,184		240,700
Single-family residential -
Banco de la Gente stated income		37,840		40,189
Commercial		245,279		247,521
Multifamily and farmland		28,662		21,047
Total real estate loans		634,448		611,206

Loans not secured by real estate:
Commercial loans		87,019		87,596
Farm loans		895		-
Consumer loans		10,005		9,832
All other loans		15,070		15,177

Total loans		747,437		723,811

Less allowance for loan losses		6,844		7,550

Total net loans	$	740,593		716,261

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, Wake and Durham 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, 2017, 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 September 30, 2017, 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 5% 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, 2017, 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 September 30, 2017, commercial loans comprised approximately 12% 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 of 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, 2017 and December 31, 2016:

September 30, 2017
(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	$	206		-		206		75,277		75,483		-
Single-family residential		2,268		416		2,684		244,500		247,184		-
Single-family residential -
Banco de la Gente stated income		1,363		462		1,825		36,015		37,840		-
Commercial		27		229		256		245,023		245,279		-
Multifamily and farmland		-		12		12		28,650		28,662		-
Total real estate loans		3,864		1,119		4,983		629,465		634,448		-

Loans not secured by real estate:
Commercial loans		121		1,013		1,134		85,885		87,019		-
Farm loans		-		-		-		895		895		-
Consumer loans		93		5		98		9,907		10,005		-
All other loans		-		-		-		15,070		15,070		-
Total loans	$	4,078		2,137		6,215		741,222		747,437		-

December 31, 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	$	-		10		10		61,739		61,749		-
Single-family residential		4,890		80		4,970		235,730		240,700		-
Single-family residential -
Banco de la Gente stated income		5,250		249		5,499		34,690		40,189		-
Commercial		342		126		468		247,053		247,521		-
Multifamily and farmland		471		-		471		20,576		21,047		-
Total real estate loans		10,953		465		11,418		599,788		611,206		-

Loans not secured by real estate:
Commercial loans		273		-		273		87,323		87,596		-
Farm loans		-		-		-		-		-		-
Consumer loans		68		6		74		9,758		9,832		-
All other loans		3		-		3		15,174		15,177		-
Total loans	$	11,297		471		11,768		712,043		723,811		-

The following table presents non-accrual loans as of September 30, 2017 and December 31, 2016:

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	16		22
Single-family residential		1,728		1,662
Single-family residential -
Banco de la Gente stated income		1,502		1,340
Commercial		1,422		669
Multifamily and farmland		12		78
Total real estate loans		4,680		3,771

Loans not secured by real estate:
Commercial loans		229		21
Consumer loans		22		33
Total	$	4,931		3,825

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 $21.3 million, $23.5 million and $22.9 million at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. Interest income recognized on accruing impaired loans was $1.1 million, $871,000 and $1.2 million for the nine months ended September 30, 2017, the nine months ended September 30, 2016 and the year ended December 31, 2016, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following table presents impaired loans as of September 30, 2017:

September 30, 2017
(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	216		-		221		221		7
Single-family residential		4,978		1,142		4,232		5,374		42
Single-family residential -
Banco de la Gente stated income		17,127		-		17,743		17,743		1,123
Commercial		3,513		1,619		2,181		3,800		45
Multifamily and farmland		12		-		78		78		-
Total impaired real estate loans		25,846		2,761		24,455		27,216		1,217

Loans not secured by real estate:
Commercial loans		233		229		39		268		-
Consumer loans		179		-		189		189		3
Total impaired loans	$	26,258		2,990		24,683		27,673		1,220

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, 2017 and 2016.

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	246		5		369		3		253		11		375		10
Single-family residential		4,783		71		6,556		40		5,113		202		8,921		122
Single-family residential -
Banco de la Gente stated income		17,283		225		17,395		207		17,235		694		17,673		657
Commercial		3,852		18		4,013		24		3,712		144		5,376		73
Multifamily and farmland		12		-		78		-		45		-		79		3
Total impaired real estate loans		26,176		319		28,411		274		26,358		1,051		32,424		865

Loans not secured by real estate:
Commercial loans		243		-		116		-		130		3		123		-
Consumer loans		183		3		225		2		206		8		235		6
Total impaired loans	$	26,602		322		28,752		276		26,694		1,062		32,782		871

The following table presents impaired loans as of and for the year ended December 31, 2016:

December 31, 2016
(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	$	282		-		278		278		11		330		13
Single-family residential		5,354		703		4,323		5,026		47		7,247		164
Single-family residential -
Banco de la Gente stated income		18,611		-		18,074		18,074		1,182		17,673		861
Commercial		3,750		1,299		2,197		3,496		166		4,657		152
Multifamily and farmland		78		-		78		78		-		78		-
Total impaired real estate loans		28,075		2,002		24,950		26,952		1,406		29,985		1,190

Loans not secured by real estate:
Commercial loans		27		-		27		27		-		95		-
Consumer loans		211		-		202		202		3		222		8
Total impaired loans	$	28,313		2,002		25,179		27,181		1,409		30,302		1,198

Changes in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 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, 2017:
Allowance for loan losses:
Beginning balance	$	1,152			2,126			1,377			1,593			52			675			-		204			371		7,550
Charge-offs		-			(64	)		-			-			(66	)		(63	)		-		(288	)		-		(481	)
Recoveries		12			26			-			17			-			23			-		102			-		180
Provision		(178	)		(211	)		(101	)		(192	)		86			(74	)		-		143			122		(405	)
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844

Three months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$	1,183			1,819			1,293			1,463			75			704			-		158			472		7,167
Charge-offs		-			(20	)		-			-			-			(26	)		-		(106	)		-		(152	)
Recoveries		2			9			-			4			-			8			-		24			-		47
Provision		(199	)		69			(17	)		(49	)		(3	)		(125	)		-		85			21		(218	)
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844

Allowance for loan losses at September 30, 2017:
Ending balance: individually
evaluated for impairment	$	-			-			1,104			42			-			-			-		-			-		1,146
Ending balance: collectively
evaluated for impairment		986			1,877			172			1,376			72			561			-		161			493		5,698
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844

Loans at September 30, 2017:
Ending balance	$	75,483			247,184			37,840			245,279			28,662			87,019			895		25,075			-		747,437

Ending balance: individually
evaluated for impairment	$	10			1,875			15,732			3,069			-			229			-		-			-		20,915
Ending balance: collectively
evaluated for impairment	$	75,473			245,309			22,108			242,210			28,662			86,790			895		25,075			-		726,522

(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

The provision for loan losses for the three months ended September 30, 2017 was a credit of $218,000, as compared to a credit of $360,000 for the three months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

The provision for loan losses for the nine months ended September 30, 2017 was a credit of $405,000, as compared to a credit of $1.1 million for the nine months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

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. Certificates of deposit 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, 2017 and December 31, 2016:

September 30, 2017
(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	$	-		11,007		-		-		-		562		-		838		-		12,407
2- High Quality		11,541		118,964		-		35,461		1,986		18,836		-		3,502		1,161		191,451
3- Good Quality		51,307		87,337		15,318		190,950		23,565		62,767		756		5,015		13,096		450,111
4- Management Attention		6,063		21,783		15,318		13,366		1,942		4,362		139		582		813		64,368
5- Watch		6,285		4,679		3,506		4,034		1,157		235		-		24		-		19,920
6- Substandard		287		3,414		3,698		1,468		12		257		-		44		-		9,180
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	75,483		247,184		37,840		245,279		28,662		87,019		895		10,005		15,070		747,437

December 31, 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	$	-		14,996		-		-		-		541		-		959		-		16,496
2- High Quality		9,784		109,809		-		39,769		2,884		26,006		-		3,335		2,507		194,094
3- Good Quality		33,633		82,147		16,703		176,109		14,529		55,155		-		4,842		10,921		394,039
4- Management Attention		10,892		25,219		15,580		24,753		2,355		5,586		-		619		1,749		86,753
5- Watch		7,229		4,682		3,943		4,906		1,201		246		-		31		-		22,238
6- Substandard		211		3,847		3,963		1,984		78		62		-		42		-		10,187
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		4		-		4
Total	$	61,749		240,700		40,189		247,521		21,047		87,596		-		9,832		15,177		723,811

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.6 million and $5.9 million at September 30, 2017 and December 31, 2016, 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 $22,000 and $81,000 in performing loans classified as TDR loans at September 30, 2017 and December 31, 2016, respectively.

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2017.

Three and nine months ended September 30, 2017
(Dollars in thousands)
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential		2	$	22		22
Total real estate TDR loans		2		22		22
Total TDR loans		2	$	22		22

During the three and nine months ended September 30, 2017, two 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 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 loans modified as TDR that defaulted during the three and nine months ended September 30, 2017 and 2016, 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