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3. Loans
 6 Months Ended
Jun. 30, 2018
Receivables [Abstract]  
3. Loans

Major classifications of loans at June 30, 2018 and December 31, 2017 are summarized as follows:

 

(Dollars in thousands)            
   

June 30, 2018

    

December 31, 2017

  
Real estate loans:            
Construction and land development   $ 79,769       84,987  
Single-family residential     250,620       246,703  
Single-family residential -                
Banco de la Gente stated income     35,847       37,249  
Commercial     269,792       248,637  
Multifamily and farmland     28,667       28,937  
Total real estate loans     664,695       646,513  
                 
Loans not secured by real estate:                
Commercial loans     93,580       89,022  
Farm loans     1,023       1,204  
Consumer loans     9,422       9,888  
All other loans     13,164       13,137  
                 
Total loans     781,884       759,764  
                 
Less allowance for loan losses     6,277       6,366  
                 
Total net loans   $ 775,607       753,398  

 

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 June 30, 2018, 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 June 30, 2018, single-family residential loans comprised approximately 37% 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 June 30, 2018, commercial real estate loans comprised approximately 35% 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 June 30, 2018, 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 June 30, 2018 and December 31, 2017:

 

June 30, 2018                                    
(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   $ 631       -       631       79,138       79,769       -  
Single-family residential     1,251       481       1,732       248,888       250,620       -  
Single-family residential -                                                
Banco de la Gente stated income     940       232       1,172       34,675       35,847       -  
Commercial     946       202       1,148       268,644       269,792       -  
Multifamily and farmland     -       -       -       28,667       28,667       -  
Total real estate loans     3,768       915       4,683       660,012       664,695       -  
                                                 
Loans not secured by real estate:                                                
Commercial loans     4       94       98       93,482       93,580       -  
Farm loans     -       -       -       1,023       1,023       -  
Consumer loans     158       5       163       9,259       9,422       -  
All other loans     -       -       -       13,164       13,164       -  
Total loans   $ 3,930       1,014       4,944       776,940       781,884       -  

 

December 31, 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   $ 277       -       277       84,710       84,987       -  
Single-family residential     3,241       193       3,434       243,269       246,703       -  
Single-family residential -                                                
Banco de la Gente stated income     4,078       465       4,543       32,706       37,249       -  
Commercial     588       -       588       248,049       248,637       -  
Multifamily and farmland     -       12       12       28,925       28,937       -  
Total real estate loans     8,184       670       8,854       637,659       646,513       -  
                                                 
Loans not secured by real estate:                                                
Commercial loans     53       100       153       88,869       89,022       -  
Farm loans     -       -       -       1,204       1,204       -  
Consumer loans     113       5       118       9,770       9,888       -  
All other loans     -       -       -       13,137       13,137       -  
Total loans   $ 8,350       775       9,125       750,639       759,764       -  

 

The following table presents non-accrual loans as of June 30, 2018 and December 31, 2017:

 

(Dollars in thousands)            
   

June 30, 2018

    

December 31, 2017

  
Real estate loans:            
Construction and land development   $ 123       14  
Single-family residential     1,829       1,634  
Single-family residential -                
Banco de la Gente stated income     1,467       1,543  
Commercial     768       396  
     Multifamily and farmland     -       12  
Total real estate loans     4,187       3,599  
                 
Loans not secured by real estate:                
Commercial loans     94       100  
Consumer loans     11       12  
Total   $ 4,292       3,711  

 

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 $24.3 million, $24.6 million and $22.4 million at June 30, 2018, December 31, 2017 and June 30, 2017, respectively. Interest income recognized on accruing impaired loans was $697,000, $1.4 million, and $740,000 for the six months ended June 30, 2018, the year ended December 31, 2017 and the six months ended June 30, 2017, 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 June 30, 2018:

 

June 30, 2018                              
(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   $ 357       -       357       357       8  
Single-family residential     4,992       725       4,267       4,992       39  
Single-family residential -                                        
Banco de la Gente stated income     16,213       -       16,213       16,213       1,082  
Commercial     2,489       402       2,087       2,489       20  
Multifamily and farmland     -       -       -       -       -  
Total impaired real estate loans     24,051       1,127       22,924       24,051       1,149  
                                         
Loans not secured by real estate:                                        
Commercial loans     96       94       2       96       -  
Consumer loans     133       -       133       133       2  
Total impaired loans   $ 24,280       1,221       23,059       24,280       1,151  

 

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and six months ended June 30, 2018 and 2017.

 

(Dollars in thousands)                                                
     Three months ended      Six months ended  
    June 30, 2018      June 30, 2017     June 30, 2018      June 30, 2017  
     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   $ 373       5       304       2       341       11       265       6  
Single-family residential     6,306       66       4,595       63       6,325       135       5,185       131  
Single-family residential -                                                                
Banco de la Gente stated income     14,841       230       17,539       232       14,981       467       17,271       469  
Commercial     2,304       42       3,831       66       2,359       80       3,778       125  
Multifamily and farmland     -       -       45       -       4       -       56       -  
Total impaired real estate loans     23,824       343       26,314       363       24,010       693       26,555       731  
                                                                 
Loans not secured by real estate:                                                                
Commercial loans     98       -       129       3       100       -       95       3  
Farm loans (non RE)     -       -       -       -       -       -       -       -  
Consumer loans     141       2       221       3       146       4       215       6  
Total impaired loans   $ 24,063       345       26,664       369       24,256       697       26,865       740  

 

The following table presents impaired loans as of and for the year ended December 31, 2017:

 

December 31, 2017                                          
(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       -       277       277       6       253       17  
Single-family residential     5,226       1,135       3,686       4,821       41       5,113       265  
Single-family residential -                                                        
Banco de la Gente stated income     17,360       -       16,805       16,805       1,149       16,867       920  
Commercial     2,761       807       1,661       2,468       1       3,411       148  
Multifamily and farmland     78       -       12       12       -       28       -  
Total impaired real estate loans     25,707       1,942       22,441       24,383       1,197       25,672       1,350  
                                                         
Loans not secured by real estate:                                                        
Commercial loans     264       100       4       104       -       149       3  
Consumer loans     158       -       154       154       2       194       9  
Total impaired loans   $ 26,129       2,042       22,599       24,641       1,199       26,015       1,362  

 

Changes in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017 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  
Six months ended June 30, 2018:                                                            
Allowance for loan losses:                                                            
Beginning balance   $ 804       1,812       1,280       1,193       72       574       -       155       476       6,366  
Charge-offs     -       (43 )     -       (271 )     (5 )     (2 )     -       (186 )     -       (507 )
Recoveries     3       27       -       7       1       16       -       102       -       156  
Provision     (139 )     (158 )     (47 )     491       4       (1 )     -       79       33       262  
Ending balance   $ 668       1,638       1,233       1,420       72       587       -       150       509       6,277  
                                                                                 
Three months ended June 30, 2018:                                                                                
Allowance for loan losses:                                                                                
Beginning balance   $ 651       1,640       1,265       1,298       73       706       -       136       604       6,373  
Charge-offs     -       (43 )     -       (271 )     -       (2 )     -       (85 )     -       (401 )
Recoveries     1       22       -       4       -       8       -       39       -       74  
Provision     16       19       (32 )     389       (1 )     (125 )     -       60       (95 )     231  
Ending balance   $ 668       1,638       1,233       1,420       72       587       -       150       509       6,277  
                                                                                 
Allowance for loan losses at June 30, 2018:                                                                                
Ending balance: individually                                                                                
evaluated for impairment   $ -       2       1,066       18       -       -       -       -       -       1,086  
Ending balance: collectively                                                                                
evaluated for impairment     668       1,636       167       1,402       72       587       -       150       509       5,191  
Ending balance   $ 668       1,638       1,233       1,420       72       587       -       150       509       6,277  
                                                                                 
Loans at June 30, 2018:                                                                                
Ending balance   $ 79,769       250,620       35,847       269,792       28,667       93,580       1,023       22,586       -       781,884  
                                                                                 
Ending balance: individually                                                                                
evaluated for impairment   $ 95       2,132       14,975       2,103       -       94       -       -       -       19,399  
Ending balance: collectively                                                                                
evaluated for impairment   $ 79,674       248,488       20,872       267,689       28,667       93,486       1,023       22,586       -       762,485  

 

(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  
Six months ended June 30, 2017:                                                            
Allowance for loan losses:                                                            
Beginning balance   $ 1,152       2,126       1,377       1,593       52       675       -       204       371       7,550  
Charge-offs     -       (44 )     -       (66 )     -       (37 )     -       (182 )     -       (329 )
Recoveries     10       16       -       14       -       15       -       78       -       133  
Provision     21       (279 )     (84 )     (78 )     23       51       -       58       101       (187 )
Ending balance   $ 1,183       1,819       1,293       1,463       75       704       -       158       472       7,167  
                                                                                 
Three months ended June 30, 2017:                                                                                
Allowance for loan losses:                                                                                
Beginning balance   $ 969       2,003       1,328       1,655       73       628       -       178       429       7,263  
Charge-offs     -       (24 )     -       -       (66 )     (35 )     -       (73 )     -       (198 )
Recoveries     3       9       -       6       -       7       -       28       -       53  
Provision     211       (169 )     (35 )     (198 )     68       104       -       25       43       49  
Ending balance   $ 1,183       1,819       1,293       1,463       75       704       -       158       472       7,167  
                                                                                 
Allowance for loan losses at June 30, 2017:                                                                                
Ending balance: individually                                                                                
evaluated for impairment   $ -       -       1,103       65       -       27       -       -       -       1,195  
Ending balance: collectively                                                                                
evaluated for impairment     1,183       1,819       190       1,398       75       677       -       158       472       5,972  
Ending balance   $ 1,183       1,819       1,293       1,463       75       704       -       158       472       7,167  
                                                                                 
Loans at June 30, 2017:                                                                                
Ending balance   $ 71,213       240,993       38,875       243,957       30,125       94,567       1,591       23,717       -       745,038  
                                                                                 
Ending balance: individually                                                                                
evaluated for impairment   $ -       1,152       16,792       3,724       -       230       -       -       -       21,898  
Ending balance: collectively                                                                                
evaluated for impairment   $ 71,213       239,841       22,083       240,233       30,125       94,337       1,591       23,717       -       723,140  

 

The provision for loan losses for the three months ended June 30, 2018 was an expense of $231,000, as compared to an expense of $49,000 for the three months ended June 30, 2017. The increase in the provision for loan losses is primarily attributable to a $36.9 million increase in loans from June 30, 2017 to June 30, 2018.

 

The provision for loan losses for the six months ended June 30, 2018 was an expense of $262,000, as compared to a credit of $187,000 for the six months ended June 30, 2017. The increase in the provision for loan losses is primarily attributable to a $36.9 million increase in loans from June 30, 2017 to June 30, 2018.

 

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 June 30, 2018 and December 31, 2017:

 

June 30, 2018                                                            
(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   $ 472       7,134       -       -       -       574       -       576       -       8,756  
2- High Quality     20,688       125,870       -       29,624       477       23,450       -       3,305       2,259       205,673  
3- Good Quality     49,044       91,359       14,373       218,439       25,325       61,998       870       4,909       10,128       476,445  
4- Management Attention     4,411       18,816       14,727       17,868       1,750       7,168       153       590       777       66,260  
5- Watch     4,884       3,996       3,112       3,093       1,115       283       -       20       -       16,503  
6- Substandard     270       3,445       3,635       768       -       107       -       22       -       8,247  
7- Doubtful     -       -       -       -       -       -       -       -       -       -  
8- Loss     -       -       -       -       -       -       -       -       -       -  
Total   $ 79,769       250,620       35,847       269,792       28,667       93,580       1,023       9,422       13,164       781,884  

 

December 31, 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   $ 152       8,590       -       -       -       446       -       791       -       9,979  
2- High Quality     20,593       120,331       -       34,360       561       17,559       -       3,475       2,410       199,289  
3- Good Quality     53,586       89,120       14,955       196,439       25,306       65,626       1,085       5,012       9,925       461,054  
4- Management Attention     4,313       20,648       15,113       13,727       1,912       5,051       119       562       802       62,247  
5- Watch     6,060       4,796       3,357       3,671       1,146       223       -       23       -       19,276  
6- Substandard     283       3,218       3,824       440       12       117       -       25       -       7,919  
7- Doubtful     -       -       -       -       -       -       -       -       -       -  
8- Loss     -       -       -       -       -       -       -       -       -       -  
Total   $ 84,987       246,703       37,249       248,637       28,937       89,022       1,204       9,888       13,137       759,764  

 

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $1.8 million and $4.5 million at June 30, 2018 and December 31, 2017, 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 was $33,000 and $21,000 in performing loans classified as TDR loans at June 30, 2018 and December 31, 2017, respectively.

 

The following table presents an analysis of TDR loan modifications during the three and six months ended June 30, 2018.

 

Three and six months ended June 30, 2018                  
(Dollars in thousands)                  
    Number of Contracts     Pre-Modification Outstanding Recorded Investment     Post-Modification Outstanding Recorded Investment  
Real estate loans                  
Single-family residential     1     $ 33       33  
Total real estate TDR loans     1       33       33  
                         
Total TDR loans     1     $ 33       33  

 

During the three and six months ended June 30, 2018, 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 new TDR modifications during the three and six months ended June 30, 2017.

 

There were no loans modified as TDR that defaulted during the three and six months ended June 30, 2018 and 2017, 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.